TradingMedium

4 min read · 769 words

What the seat actually does

A trading seat answers the question "at what price will you buy this from me, and at what price will you sell it to me" — and is then obliged to trade at whichever of the two the other side picks. Everything else follows from that obligation.

The position is a by-product, not a decision. A market maker who buys because a client sold has not expressed a view; they have taken inventory in exchange for a spread. The skill is what happens next: what part of that inventory is hedged, what part is kept because the desk wanted it anyway, and how long the rest is carried before it becomes somebody else's problem.

  • Quoting — a two-way price wide enough to be paid for the risk and tight enough to win the trade.
  • Warehousing — holding what the quote produced, for minutes or for months.
  • Hedging — removing the risk that was not the point, at a cost that is itself a risk.
  • Unwinding — finding the other side, which is the part nobody schedules and everybody underestimates.

A proprietary seat, where the position is the decision, is a different job wearing similar clothes; most of it moved to the buy side after the post-2008 rules, which is why so many of the seats on this map are there.

A day, and where it goes

  • Before the open — the book as it was left, marked, and what changed overnight in the things it is hedged with rather than in the things it holds.
  • The open — the widest spreads of the day, because nobody yet knows where the level is.
  • Through the session — quoting, and watching one number: how much the book makes or loses if the market moves one unit. On a rates desk that is the yield curve; on an options desk it is a grid of them.
  • The close — marking the book, which on anything that does not trade every day is an opinion that has to be defensible.

What it is measured on

  • Profit and loss, split into where it came from. Spread earned, position moved, hedge cost, carry. A desk that made money because the market went its way did not make money at market making, and the split is what says so.
  • Risk used against limits — the position that produced the profit matters as much as the profit. Twice the return on four times the risk is a worse quarter, not a better one.
  • Whether clients keep asking. A desk that quotes wide when it is difficult is not asked when it is easy.
  • Marks that survive being checked. An independent price verification against something observable is a routine check and an occasional scandal.

What it touches on this site

How it goes wrong

  • The hedge is not the position. Two things that moved together for years stop, and the book that was flat is not. Every case study on this site with the word "basis" in it is this.
  • Liquidity is assumed to be there on the way out. A position sized for a market that trades every day is a different position in a market that trades on Thursdays.
  • The mark is the trader's. A book of instruments nobody else prices is a book valued by the person paid on its value.
  • Funding disappears before the price does. The 1998 shape: the trade was right and the carry ran out first.

Concepts to master

  • Inventory is a cost, not a stock. It funds, it hedges, it occupies balance sheet, and every day it does not move it earns nothing.
  • The Greeks are a language for one question — what happens to this book if something moves. See volatility.
  • Skew is a price, not a distortion. The options market charges more for one direction because somebody has to hold what is sold.
  • Two-way means obliged. A quote a desk will not honour is not a quote, and a market maker's whole value is that the price is real.

Information and education only. Every page, figure and calculator on this site exists to explain how financial instruments work. Nothing here is investment, tax or legal advice, a recommendation, or a valuation you can rely on. Full disclaimer