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How Flow Trading Differs from Market Making

Article Quant Q&A · Author: Murilo Gomes
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Summary

The document distinguishes flow trading from market making in a bank trading-desk context. It describes flow trading as taking speculative positions based on a view about future market direction. It describes market making as earning the spread on trades where clients transact with the desk as counterparty.

The distinction is about the source of risk and revenue: directional positions expose the desk to asset-price moves, while market making centers on spreads earned from client transactions. The text briefly links speculative bank trading to regulatory concern, mentioning the Volcker rule. It offers a concise terminology clarification rather than a detailed account of desk operations, funding arrangements, or how individual firms may use the term “flow trading.”

Key ideas

  • Flow trading can refer to speculative positions based on expectations about market direction.
  • Market makers earn spreads on transactions with clients as counterparties.
  • The described distinction separates directional price risk from spread-based revenue.
  • Terminology can vary, and the document gives a brief definition rather than a comprehensive taxonomy.

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Market makingEquities
Full text
# What is the difference between Flow Trading and Market Making?


# What is the difference between Flow Trading and Market Making?












Are there two definitions to Flow Trading? From reading online, I've gathered two, but I'm not sure if I am mistaken, so a little bit of clarification would be very much appreciated.

(1) Flow Trading - trading that uses clients' money (I would assume something like a hedge fund)

(2) Flow Trading - same as market making (buys/sells based on incoming flow of orders from clients, but uses its own money)

## Answer by SuavestArt (score 0, accepted)

https://quant.stackexchange.com/a/73972

Flow trading would be 'taking positions based on where they think the market is heading' according to this source. In other words, speculation on asset prices done by banks. This has been a concern of regulators in the US (Volcker rule) and elsewhere.

On the other hand, market making desks profit from spreads embedded in transactions in which a client is a counterparty.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.