Market Maker Scale, Volume Attribution, and Operating Differences
Summary
The document asks about market makers’ capital, leverage, returns, and share of trading volume. Its answers emphasize that market makers vary widely, from large banks to small proprietary firms, so there is no single representative operating profile. One cited study of a high-frequency trader in a European market is suggested as a source of specific statistics on trades, capital, and profit or loss; the answer cautions readers to assess the study’s methodology.
The discussion also explains why assigning a percentage of a completed trade’s volume to the liquidity provider is ambiguous: a market maker quotes, while a counterparty chooses to trade, and both participate in the transaction. A further comment points to transaction costs as an important competitive factor. The document does not provide evidence sufficient to compare firms or establish typical returns, and the volume attribution argument is conceptual rather than a measurement framework. Its main lesson is to treat market makers as a heterogeneous group and define volume responsibility carefully.
Key ideas
- Market makers range from large banks to small proprietary firms, making a single operating profile misleading.
- A cited study of one European high-frequency trader may offer firm-level statistics, but its methodology should be evaluated.
- Assigning traded volume to either the liquidity provider or the counterparty is a matter of attribution convention.
- Low transaction costs are presented as an important competitive advantage for market-making firms.
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Full text
# Operating parameters of market makers? # Operating parameters of market makers? I'd like to get a feel for the operating parameters of official market makers. I'm looking more for discerning characteristics, rather than exact numbers or an exhaustive list of each MM. Examples: what is their working capital? How much leverage do they use intraday? What returns do they achieve? What is their contribution to trade volume? How to these numbers compare to other market participants? ## Answer by Louis Marascio (score 9, accepted) https://quant.stackexchange.com/a/1866 The paper "High Frequency Trading and The New-Market Makers" by Menkveld will likely have information that will be interesting to you. The paper breaks down the activity of one HFT in a European market. It provides statistics such as the # of trades, capital required, average profit, loss, etc. You can judge for yourself whether you trust the numbers based on their methodology. It's an interesting read none the less. ## Answer by chrisaycock (score 8) https://quant.stackexchange.com/a/164 Market makers covers a broad range of shops, from large investment banks to small proprietary trading firms. So working capital can be in the millions or the billions, and leverage can be anywhere from 2x to 30x. This is no different from buy-side firms, which includes a variety of both asset managers and retail investors. There is tons of diversity among market makers. As for contribution to volume, a liquidity provider merely quotes a price; the trade doesn't happen until a buy-side counter-party decides to accept. For example, given a trade of 100 shares between a market maker and an asset manager, we wouldn't say that the market maker was responsible for 50 shares of the trade. We would just say that 100 shares were traded. With this in mind, we can claim that the market maker is responsible for all trading volume, or we can claim that the market maker is responsible for no trading volume (and that the buy-side firm is responsible for all volume). Either seems plausible. ## Answer by Drew (score 0) https://quant.stackexchange.com/a/21373 Appropriately, heterogeneity of approaches has been discussed. But one facet that may bear emphasis is the individual firm's transactions costs. To compete as a market maker, is it would seem paramount to have a edge here. Moreover, some exchanges seem to choose their champions, and it would be best to be among them.
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