Market Making

Financial markets need buyers and sellers at all times. Market makers fill this role by continuously quoting prices at which they will buy or sell a given instrument. They earn the spread between the two prices but take on inventory risk each time a trade is executed. The goal is to manage this activity profitably while keeping the risk from holding open positions within acceptable limits.

The daily work involves developing and monitoring the algorithms that set prices, managing the inventory of positions that builds up during the trading day, and hedging residual risk. You adjust quoting strategies in response to changes in volatility, liquidity, and market conditions. Stress testing strategies against extreme scenarios is part of checking whether the approach is robust.

The main tools are Python and C++. Python is used for research and backtesting; C++ is used where execution speed matters. Key techniques include statistical modelling of price movements, inventory optimisation, and options pricing. Knowledge of the specific market is important: equities, fixed income, and derivatives each have different dynamics.

Market making work sits within the Trading sector and connects closely to the Trader and Quantitative Analyst roles. It is concentrated at a small number of specialist trading firms and large bank trading desks. In the Netherlands, Amsterdam is home to several significant market making firms in equity and derivatives markets.