The Difference Between Price Makers and Market Makers – Greenwich Associates Blog
April 7, 2016 \ 6 Comments
Full Article: Greenwich Associates
Market makers either continuously provide two sided quotes or are willing to do so at any time on demand. They do this to make money by facilitating the trades of other via spread capture. A buy side price maker does not continuously provide quotes and makes money generating investment returns for their clients.
Good report. Some comments: Paying for liquidity: I agree that liquidity will return when dealers are appropriately paid for providing it. While low rates, huge primary issuance and largely one-directional flows from investors exacerbate the problem, the real question is how to pay dealers for providing liquidity. In some respects, many of the all to all platforms cropping up indicate that investors, or more appropriately all-to-all ATS operators making a bet on behalf of investors, are trying to keep the status quo of investors not paying for liquidity. Why pay for balance sheet for bonds that can be easily bought… Read more »
Thank you to Greenwich for the timely research and blog post here. I think that the noise around this issue obscures the simple reality: who benefits from what? I refer below to the pure argument only, of the buyside becoming dealer-like market makers or price makers. Here is why it won’t happen. Dealers today simply do not have a material incentive to take risk on most trades, and when I say dealer I refer to both the firm and the individual trader. When bonds were “more liquid” (an arguable point in its own right), dealers were paid very well for… Read more »
This is a sound well researched article. Marking-making is akin to insurance. If premiums are paid the donwsides will be covered when it goes wrong. If you skimp on the premiums you’ll have nothing to run when the house burns down. Of course, if you have enough capital, you can be an insurer yourself but you unlikely to be very good at it.
Today, the market isn’t paying the premiums. The dealers aren’t being remunerated to provide constant liquidity. Do-it-yourself or all-to-all will never be as good as the specialists.
The most interesting finding in the Greenwich report to me is that more accounts now think they can be liquidity providers after ignoring the situation for the last 3-5 years. And Greenwich does a good job of clarifying what they believe that means regarding market making and what they call price making but what I will call opportunistic liquidity provision. Hedge funds cannot be market makers in credit as it is an information business and they will be cut off from information by the dealers and they don’t have salespeople to cover accounts to get the info. Plus, what account… Read more »
Nice work by GA, in that it begins to address what you can likely expect from the buy side in regards to additional liquidity. Given the role of the buy side, their incentives, and mandates…..the answer seems to be “some”, but not material enough. Once you have a buy side firm that says, “yes I can do this, and want to”…what next? GA shows that the buy side recognizes the need for prices, but the mechanism for the next step is going to be “evaluated prices”? I am in complete agreement with Mustang. Given the historical quality of this data,… Read more »
Another well researched and thought provoking article from Kevin McPartland and Greenwich. How deep does the ‘planning to do so’ (make prices) actually go? Are firms speaking from frustration with the status quo and making threats or have they really planned a course of action and worked it all out? It seems to me that price making is quite a responsibility for firms to take on. Do they have the manpower, or are they planning to hire? Firms would not only have to set the prices, which is relatively easy, but then they have to monitor them, put trades and… Read more »
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