Why a Market Maker May Trade at a Price That Appears to Be a Loss
Summary
A trade at the quoted bid does not, by itself, reveal the market maker’s complete transaction history or prove that the maker bought at the ask and sold at the bid. The answer explains that market-making rules differ across markets and that a dealer may hold inventory acquired at earlier prices, then sell those securities while filling a later trade.
The example highlights why a single bid, ask, and execution price are insufficient to infer the dealer’s profit on a position. The explanation is conceptual and offers no market-specific rule or additional trade data, so it does not determine the exact prices at which the market maker bought or sold in the described case.
Key ideas
- A trade at the bid does not establish the market maker’s full cost basis.
- A dealer may sell inventory acquired earlier at a lower price.
- Market-making obligations and rules differ across venues.
Tags
Full text
# Estimate the market maker's price from the posted Bid/Ask and Trade price # Estimate the market maker's price from the posted Bid/Ask and Trade price If I see a Bid at 181.77 and and Ask at 181.78 for SPY and then immediately see a trade filled at 181.77 on BATS, then what can we conclude about market making activity? i.e At what price did the market maker buy from the seller and at what price did he sell to the buyer? I thought since MM takes the other side of each trade, he bought at 181.78 and sold at 181.77 but obviously this is false since he is at a loss here. ## Answer by RndmSymbl (score 1, accepted) https://quant.stackexchange.com/a/10209 Market making refers to an activity in the markets that provides a market for a given securities. Each market has different rules on market making (see LSE rules). However, I do not see a need for a market maker to fill at a loss necessarily, because he may warehouse the securities. That is, he may still hold securities that were bought at an even lower price and he may choose to sell these before he sells more expensive ones.
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