Quote Originally Posted by shawn_molodow View Post
Hi Billy,

I love the insider's view of the MM industry. I found the discussion around the Senior MM's focusing on the LT time frames (TF's) while the junior MM's focused on the daily TF's particularly interesting. I had a couple of Q's:

1. Back in the day, how were decisions made and coordinated between Senior MM's and Junior MM's at a firm to short a position nakedly such as to drive down prices and/or "fish for" for stops to takeout the retail holders?? Did individuals make these decisions and take action themselves without direction and coordination with others at the MM? I gather this is all done now via algo programs and HFT trading now, right?

2. How did the MM's make decisions about holding large inventories of a particular position for the LT time frames, monthly, quarterly, etc.? I don't suspect that a large client would leave their orders on the books for months, but perhaps I am wrong about that? In other words, weren't the Senior MM's making directional bets on particular positions without much clear visibility on the large institutional orders that would be needed to support them?

Thanks in advance,

Shawn
Shawn,
1. We had a quick management morning briefing before the market opened. Each junior was allocated his daily quota of shares to sell- naked or not- or buy from/for the house inventory in the securities he was responsible for, usually only one or two maximum per junior. This daily quota was determined by the seniors out of their longer term timeframes position sizing strategies. Another daily quota was given for the accumulation/distribution programs of institutional investors clients. Each junior market maker had some leeway in his decision making for shorting nakedly intraday. But the rules were that a junior had to close the day with zero overnight risk exposure and had to fulfill totally his daily quota. The junior’s bonuses were proportional to their net VWAP performance on the day. Of course today much of this is automated and optimized by algorithms and HFT.

2. Most market makers were and are still a division of a big brokerage or bank. Think Goldman Sachs. They (GS) are managing or advising tens of thousands of funds and institutional investors’ strategies around the world. The priority is of course always given to the GS market making division for the planning and execution over time of these strategies. 90% of the planning goes beyond one month, so it is of strategic importance for the senior market makers to program all the requests beyond one month and to manage their own inventories accordingly for all securities. All the daily intraday gyrations you worry about as a retail investor really mean nothing in the big picture. And it is easy to understand from the above that the ones with the best market direction control and certainty are these senior market makers. That’s why GS has only one losing trading day on average per quarter.
Billy