How Market Makers Can Benefit from Volatility During a Market Crash
Summary
The document explains a market-making perspective on high-frequency trading firms’ performance during the sharp US market decline on August 24, 2015. Market makers intermediate prices: they temporarily take on risk from participants seeking to trade and transfer that risk to other market participants. The answer suggests that increased volatility and pricing uncertainty can raise demand for this intermediation, creating more opportunities for market makers. It also notes that Virtu was reported to have had one of its most profitable days, even as the S&P 500 fell sharply.
The discussion is an economic intuition, not a detailed account of the firm’s positions, trading systems, or realized profits by strategy. A second answer asserts that high-frequency firms benefit from speed and low costs and tend to profit more when markets move quickly, but offers no supporting evidence and understates the risks of trading. The document therefore provides a useful starting concept about volatility and market-making, while leaving the actual sources of performance on that particular day unverified.
Key ideas
- Market makers earn by temporarily taking the other side of trades and transferring risk to other participants.
- Greater volatility can increase pricing uncertainty and demand for price intermediation.
- The document connects the reported performance of a high-frequency firm on a crash day to market-making activity.
- The proposed explanation is intuition rather than a demonstrated analysis of the firm’s trades or profits.
- Speed and low transaction costs do not eliminate trading risk.
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Full text
# Answer by madilyn (score 6, accepted) # What are some quantitative trading strategies used by high-frequency trading companies to make a killing on a market crash day on 24Aug2015? http://blogs.barrons.com/focusonfunds/2015/08/24/high-frequency-trading-firms-just-made-a-killing/ > Virtu Financial (VIRT), the high-speed trading firm that went public earlier this year, was one of the few stocks on the market to log gains on Monday while the S&P 500 dropped nearly 4%. Indeed, Virtu, which claims not to have posted a daily loss in years, just had one of its most profitable trading days in history. ## Answer by madilyn (score 6, accepted) https://quant.stackexchange.com/a/28341 On aggregate, large shops like Virtu are involved in market making strategies. There's various classes of market making strategies, and it is unnecessary to distinguish further here for the purpose of answering your question. For your curiosity however, Virtu is especially known for pure arb market making strategies. Without diving into technical explanation, the easiest economic intuition to understand is that a market maker is acting as a price intermediator and looks to hold on to risk temporarily for their "customers" and to transfer risk to its natural sink. (Note: A market maker generally doesn't actually have a direct customer relationship but the market matches them to other participants in what amounts to a provider-client relationship effectively). There is significant volatility on a day like Aug 24, 2015, which means significant pricing uncertainty. If there is greater pricing uncertainty, you can guess that there is greater "customer" demand for price intermediation. ## Answer by Randor (score -5) https://quant.stackexchange.com/a/19526 hft is in general a sure bet simply because , by definition, they get their orders in faster than anyone else, with minimal transactions costs... (except other hft'ers!). so, there is virtually no risk in the trades they do i would not expect any hfters to lose money ever, except if they have a bug in their algos, ir they are actually taking risks the faster the market moves, the more money hfters wohld make per trade.
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