Hedge Fund
Why The Grasshopper Ate The Market Makers' Free Lunch
February 2022 - Hedge Fund
Why the Grasshopper are the Market Makers' Free Lunch
When the world moved to electronic trading, there was much resistance. Mostly from the people who had their license to print money taken away. Market makers used to be the only ones allowed to deal in financial securities as part of a wider exchange in pits and open outcry. Prices were quoted in units of eighths or sixteenths, which meant the spread between bids and offers was wide so margins were huge. Clearly things had to change, and I remember a time when a floor broker on the Frankfurt Stock Exchange would stop all trading because he had become hungry. It meant that stocks of large global companies such as BMW or Siemens could not be bought or sold until a certain someone had finished his lunch.
The UK feared it may never catch on, after all there had been market makers for hundreds of years. Therefore, both systems ran simultaneously for a while. Those who preferred to deal through the floor and others that traded on SETS, the new electronic means of accessing the market directly. What it really meant was that you had less liquidity as the market was split in half. However, wherever there is pain, there is also opportunity and the real revolution that occurred sometime in the early nineties was opening the door to algorithmic trading.
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