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Jurassic


Total Posts: 241
Joined: Mar 2018
 
Posted: 2019-05-15 11:14
I dont understand how electronic market making in banks in more illiquid products works. Im not looking for a deeply technical (ie mathematical answer).

As I understand, if you get an order from client you ideally want to instantly receive bid-offer for that. If you cannot do this I assume you want to partially fill the order, but this still leaves you with a remaining order which must be added to some inventory. In a somewhat liquid market this could be executed like an execution algo on the buyside. However, in a more illiquid market the price may move against you? How do you deal with the remaining inventory? Whats the general idea?


tbretagn


Total Posts: 276
Joined: Oct 2004
 
Posted: 2019-05-15 13:55
Two things:
a) That's what bid-offer is supposed to help you contain
b) Inventory on beta products

If it's really illiquid (for example ARS in FX), there's usually someone behind the toy. The platform is electronic, but the market-making isn't in that sense.

Et meme si ce n'est pas vrai, il faut croire en l'histoire ancienne

Jurassic


Total Posts: 241
Joined: Mar 2018
 
Posted: 2019-05-15 15:44
a) the "strategy" is to work out how long it statistically takes you to get out?
b) how does this help?

Jurassic


Total Posts: 241
Joined: Mar 2018
 
Posted: 2019-06-02 14:57
a) I think I understand but b) I have no idea

nikol


Total Posts: 749
Joined: Jun 2005
 
Posted: 2019-06-02 16:32
b) beta products = vol ~ option or insurance
i would add gas & temperature as proxy of electricity

Jurassic


Total Posts: 241
Joined: Mar 2018
 
Posted: 2019-06-12 12:17
@nikol I have no idea what you mean

nikol


Total Posts: 749
Joined: Jun 2005
 
Posted: 2019-06-12 22:06
absorb this

Alpha and beta for beginners


Jurassic


Total Posts: 241
Joined: Mar 2018
 
Posted: 2019-06-13 07:57
@nikol no i understand what they are

nikol


Total Posts: 749
Joined: Jun 2005
 
Posted: 2019-06-13 10:58
In any trade there is a risk to have a loss. It is natural to ask compensation for that risk at the moment of negotiation of trade. There are two ways:
- add risk margin (apart from commercial one). This widens bid-ask
- buy protection (insurance product). It is function of volatility, hence beta. But then, again, you want to transfer this price to the counterparty.
Under risk-neutral expectation both ways should deliver same result, but there are always inefficiencies making one way cheaper than the other.

In this liquidity does not matter. In illiquid market you have less information, more uncertainty, which you price in as risk (see above).

Jurassic


Total Posts: 241
Joined: Mar 2018
 
Posted: 2019-06-13 12:52
buy protection (insurance product). It is function of volatility, hence beta. But then, again, you want to transfer this price to the counterparty.
Under risk-neutral expectation both ways should deliver same result, but there are always inefficiencies making one way cheaper than the other.

This is the bit I dont understand. Is there anywhere I can read about it online?

nikol


Total Posts: 749
Joined: Jun 2005
 
Posted: 2019-06-13 15:23
That statement is too broad to give you one simple ref. Let's narrow your "bit".

Where do you fail?:
- beta is volatility
- volatility is risk
- risk is uncertainty
- price of the risk
- price-in risk
- risk-neutrality

tradeking


Total Posts: 24
Joined: May 2016
 
Posted: 2019-06-13 16:45
That's an interesting take on beta, nikol, but I think when tbretagn said "beta products" he could have been simply referring to using more liquid correlated instruments as a hedge.

nikol


Total Posts: 749
Joined: Jun 2005
 
Posted: 2019-06-13 16:55
Correlated instruments as a hedge is delta to me, no?

If Jurassic is confused in this, then I confess that I am the source of confusion.

tradeking


Total Posts: 24
Joined: May 2016
 
Posted: 2019-06-13 16:57
The terminology changes depending on domain. You are probably coming from the options world. In equities, you hedge out the "beta" exposure for illiquid stocks using SPY/ES.

nikol


Total Posts: 749
Joined: Jun 2005
 
Posted: 2019-06-13 17:01
> The terminology changes depending on domain.

Given the fact that I am from 'risk domain' and we don't know the domain of Jurassic (hope not Mesozoic), the original message is hard to decode. ))

ronin


Total Posts: 468
Joined: May 2006
 
Posted: 2019-06-14 08:50
> In equities, you hedge out the "beta" exposure for illiquid stocks using SPY/ES.


Well. Beta and delta isn't the same thing. Sometimes, not even close.

"There is a SIX am?" -- Arthur

tradeking


Total Posts: 24
Joined: May 2016
 
Posted: 2019-06-14 11:41
Who said they were the same?

nikol


Total Posts: 749
Joined: Jun 2005
 
Posted: 2019-06-14 11:46
Delta-hedge of volatility (here "beta") exposure makes sense, yes. It is in fundamentals.
But again, the language is really confusing.
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