Trader is a broad term. Uselessly broad if it encompasses jobs from the Vanguard employee who sends the rebalance order 4x per year to keep VOO in line with SP500 weights to the oil trader who flies into contested lands to broker cargos to a warlord. The word “trader” flatters a healthy share of W2 earners while underselling big-stakes dealmakers. Trading itself is a business, capable of being traded, bought and sold, while the soldiers within the business themselves are also called traders.
The trading decision to bother at all with this project we call “trading” is more important than the trades you make if you do bother. This is why it’s important to understand the nature of the various careers that count as “trading”.
“Market-maker” is a weird word. The first time I ever heard the alliterative phrase was being asked in an interview to “make a market” on some quantity like “how many McDonald’s are in Philadelphia”.
Eyes just glazed over. Like what does that sequence of words mean? Like you want me to go make a market? Like set up a McDonald’s in Philadelphia? The words did not compute at all.
When I see a Asian HS kid with a swag tee that includes Jane Street’s logo in the sponsorship roll, I promise you that 16-year-old knows what a market-maker is. Times have changed. The job literally pays 21-year-olds the same amount a doctor makes by the time they are in their prime only after not sleeping in their 20s during the institutional hazing period known as residency. It’s the same pool of high achievers, but one group got the memo that being a millionaire by age 27 is better than just starting to chip away at a million dollars of debt if we count in pre-tax dollars.
There’s no twist here. Ball don’t lie. The market-makers have a sweet gig. That’s why it’s hard to get. Also, the kids they hire to become market-makers…well, they’re smarter than you. You can get all triggered and start the whole EQ or “street smart “ song and dance and you wouldn’t be totally wrong, but you’d be wrong. Those kids get hired because they’ve outcompeted many other kids who, unlike in my day, are aware of the job, aware of what it takes to get the job, and really, really want the job.
Now, if your goal is to be financially successful and you found this in any way to be discouraging, then you have told on yourself. Your powers of observation and creativity are holding you back more so than your brains. You’re also a quitter and may not have a claim to even a single original thought. Since nobody in their right mind would surrender to these charges, I assume nobody feels discouraged. We’ll proceed.
The point is, it’s a job with a honed criteria. On average, you must be tall to play basketball. No controversy. But this job of market-maker is just that. A job. You’re not an entrepreneur. You’re not consumer-facing. You aren’t a deal-maker. You’re a polar bear. Adapted to a specific environment. I’m not saying these people couldn’t adapt in another one, I’m only saying that they are specialists, which is a neutral statement.
The job doesn’t require as many hats as one that must constantly interface externally or with clients, suppliers, or investors. You just talk to other nerds and maybe, if you have a Chicago or Brooklyn accent, some brokers.
Which is all to say — it’s a weird thing to fetishize. If you’re going to fetishize a job just because it makes money, what happened to rockstars or center fielders or Scott Disick.
The fetish with market-makers or almost all professional traders is misplaced. Most professional traders have exactly what the dreamers don’t want. A job. They have a job in a system. With a boss. They are highly specialized at piloting that lucrative system, but it’s not their system. A fighter pilot is a decent analogy. You have an exceptional person tuned to commanding a complex, cutting-edge machine. You want a great pilot to maximize its potential. But if we’re being honest, the machine matters more. If you have a 2.5 standard deviation pilot instead of 3, I suspect that doesn’t matter as much as having the best jet. If you’re a market maker whose machine can’t win a race, it won’t matter that you’re smarter than the trader at Jump.
Unless…
You’re not entering the battles or the races where the machine is the showcase. The traders who have the biggest p/l’s don’t necessarily get to keep the most, because they are the same traders who had the fastest plane. Well, a lot of that performance is credited to the tech. The seat.
Since I left institutional trading, I’ve had a chance to meet traders I didn’t think existed. I’ve been paid to simply be a sounding board for people who have more money than they have any idea what to do with. Money piled high by trading for themselves in active strategies. Sums that pods would be thrilled with, but this is personal capital. Those are the traders I’d think would be in the mind’s eye of the aspiring trader. No obligations to investors. Very few or even no employees. The trading versions of Phil Ivey.
[I don’t think I’d be stepping out of turn to share some commonalities I noticed in my conversations with these traders. They were all under 35. They were almost all obsessed, although some were leaving that phase. Having more loot than you can spend in a few generations is probably demotivating to anyone who isn’t a megalomaniac.
Which leads me to what I did not expect…they were all humble. It wasn’t an aww shucks humility. It came across in the way they listened. Sponges. Parsing everything. When I say humility, I mean low ego, as in they didn’t bring assumptions to the way they listened. It felt out of the ordinary and yet they all shared this quality. It left a mark on me. Since meeting them, the absence of this quality is now more noticeable.
Oh, one amusing contrast. There was this recent Pmarca bit where he shit all over introspection, meanwhile, I recall this group of traders being way out on the right tail of introspection and self-awareness. Could be a selection effect as I was approached by a 3rd party about meeting them, so I wouldn’t meet the people who didn’t agree to it.]
Anyway, back to the market-makers toiling away in their getting-paid-like-a-doctor-in-the-80s job. They’re not raising a flag, but by virtue of their academic excellence and persistence, have successfully landed, at least a temporary inheritance, of a lucrative seat. The seat is a legacy from a process I outlined in A Former Market Maker’s Perception of PFOF:
What’s absent from the narrative is how tall the pile of bodies these firms stand atop. I should know. I used to be able to work five hours a day (NYMEX alum holla) and make a lawyer’s wage. And in some years, a law partner’s carry too. Well, if you were smart you saved your money and realized it wasn’t going to last. The days of “locals” (ie wildcat market-makers) is long gone.
Many of the small firms, who saw the writing on wall and had an appetite for the long game, plowed money back into massive technology capex. Most of them just earned the right to say they lost to the best. In some cases they found small, profitable niches where they play the role of suckerfish. Respect to them, even this was not easy.
How about the remaining firms? The private giants the media likes to call “shadowy”. They were the ones who were most adept at assembling teams of software and hardware engineers working with game-theory geniuses to devise algos in a cat-and-mouse battle with competitors. The ones who stayed step-for-step with the exchanges who themselves were experimenting with matching engine rules, data, product listings and connectivity in their own battles for market share.
The truth is progress is cutthroat.
It started with skill and luck. The early big bets on talent and technology meant they were bringing guns to a knife fight. SIG wasn’t know as the “evil empire” on the Amex just because of the black jackets we wore. They understood the risk-reward was completely outsized to what it should be 25 years ago. They were amongst the first to tighten markets to steal market share. They accepted slightly worse risk-reward per trade but for way more absolute dollars. They then used the cash to scale more broadly. This allowed them to “get a look on everything”. Which means you can price and hedge even tighter. Which means you can re-invest at a yet faster rate. Now you are blowing away less coordinated competitors who were quite content to earn their hundreds of percent a year and retire early once the markets got too tight for them to compete.
SIG was playing the long game. The parallels to big tech write themselves. A few firms who bet big on the right markets start printing cash. This kicks off the flywheel:
Provide better product –> increase market share –> harvest proprietary data. Circle back to start.
The lead over your competitors compounds. Competitors die off. They call you a monopoly.
Option market-making is not a monopoly but an oligopoly since a handful of firms control a vast majority of the market share. Oligopolies tend to emerge in industries where high fixed costs are a barrier to entry.
Options market-making derives its high fixed costs from technology capex and the need for extensive market coverage. You can’t price options competitively in a thin margin game if you cannot see and connect to flow. You need both speed and breadth. If you can’t price well and access uninformed orders, then you only get filled when you’re wrong.
All the talent, pipes, compliance, quoting infrastructure, data, and regulatory overhead have to be procured and maintained whether you trade one contract or a million. Whether the VIX averages 9 or 29 for the year.
This is all easily apparent to anyone who’s been around the industry. But I’ll add a more editorial thought. Exchanges are the archetype for a business with “network effects”. They are expensive to build and maintain, but the biggest hurdle is the chicken-or-egg problem of attracting liquidity.
Unfolding today, in the wake of Hyperliquid’s great success, there’s a swath of perp exchanges trying to grab a foothold. 10 exchanges aren’t gonna make it…but it’s a lotto payoff for the winner(s). Spoils to the victor of the tournament. Spoils in the form of excess profit. Network effects mean wide moats for incumbents. These are businesses that are closer to monopolies.
I was at the NYSE and the NYMEX before they each “demutualized”. They went from being member-owned organizations that were thought of as utilities to public companies. The incentives shifted from the desires of member firms who had trading permits to public shareholders listening in on quarterly earnings calls.
This is America. What have you done for me lately? Where’s my 15% annual growth? And not only do I want the growth, I want the put. Give me consistency. Well, conveniently for exchanges, some of their biggest customers are those steady oligopolies. You want them to be happy. You want them to be good credits.
At some point, the marginal benefit of allowing an additional market maker’s ability to effect pricing in hopes of growing the pie is not worth destabilizing the symbiotic equilibrium the exchange maintains with its existing market-makers, especially as volumes hum along.
In the past 25 years, we’ve gone from 4 option exchanges to 18. Some of these have been spinoffs from incumbent exchanges. Some have been backed by the market makers themselves. You can make Friedman-esque justifications for these investments such as “customer choice”, but it’s also the standoff at a drug deal. Every investment is another gun drawn, maintaining both the tension and stability of the current equilibrium.
As we zoom in from the industry point of view to the day-to-day business of filling orders, we find the rules of engagement which inherit from the higher-level negotiated equilibrium. A mix of privilege and obligation. This is the environment in which those who become market-makers slot into when they accept their “trader” job.
From this point, we launch deeper into the privileges that accrue to these market-maker seats regardless of who sits in them.
I started on the American Stock Exchange (AMEX) on Trinity Street. It was one of the 4 option exchanges back in 2000. The AMEX was a “specialist” system. Specialist is a technical title granted to a firm on a per-symbol basis by the exchange. It confers a set of rights and obligations to a primary market maker. For example, SIG was the specialist on the AMEX for IBM options.
The specialist was in charge of broadcasting electronic quotes to the world. Market makers would “stand in the crowd” in front of the IBM post and announce their own markets, ie bids and offers, for the different option series.
If a market-maker and specialist disagreed, they could trade with each other. If there are no disagreements, the broadcast market was the aggregation of the best bid and ask from the market-makers and specialist. In the case of a multiple-listed option, for example, IBM trading on the CBOE, the agglomeration of best bids and asks is known as the NBBO (national best bid/offer).
It is hard to find a picture of what this looks like on the web, I had to dig this up from the AMEX Alumni Group on Facebook.
Floor brokers would receive orders from trading desks and investment funds, walk over to the post, and either request a quote or expose their bid/offer. If they announced a bid or offer, this is now legally public information. It was not public before it was vocalized. Similarly, an electronic order is not public until it routes to the exchange and is represented on the order book. A specialist had a waterfall view of the orders arriving and had to represent it to the crowd so that the market-makers, the specialist, and any broker in the crowd had an opportunity to fill it inside the NBBO. If they chose not to, the order if it could, would be matched with any customer bid or offers resting on the order book. At those prices, the resting customer orders had priority over market-makers but any imbalance could be filled by the traders, routed to another exchange, or if there was no marketable opposing order, it is left to rest unfilled, assuming it had a limit. Market orders, of course, always find a price.
Notice how much optionality there is in standing on the floor. You get the right of first refusal. Even more subtly, you get access to tells. If a broker buys IBM calls, then approaches the crowd again, you might guess she’s a buyer. You see the same people every day. You start to notice patterns. Today, people program computers to spot patterns. Then you could see the order urgently sprint or leisurely stroll into the crowd. The benefit of all this is bundled into the general term “time/place advantage”. We will come back to this, to see how it persists today.
This advantage is not free, but it was available to anyone with sufficient capital (low 6 figues was sufficient but not advisable) to fund a margin account with a clearing firm and either buy or lease a seat. You also had to pass a membership exam to make sure you knew the floor rules. There are lots of rules about how orders have to be handled, communication conducted, and general compliance. The test was about as hard as the Series 3 but not nearly as hard as the 7.
In addition to time/place advantage, specialists were entitled, depending on conditions to 30-40% of the volume that traded on the published markets after any customer orders were satisfied. The market-makers in the crowd had to split the remaining 60-70% (I might be a bit off on those percentages; it’s been a while). Some crowds were chill. Some were cutthroat. It wasn’t common, but things could be fisticuffs tense over whether that 40% meant rounding up or down a single contract of an order in something as juicy as an index option that trades by appointment. Also, where you physically stood in the trading crowd could easily mean the difference between hundreds of thousands of dollars per year. Standing close to brokers or being cozy with the specialist was the original co-location.
[Random aside: I met a buddy of mine who had a similar career path, although he came up through Knight/Citi back in the MSFT crowd on the Amex. Really nice guy, a year younger than me, also Cornell. He got assigned to market make in that crowd a few months after I joined it. We were both pretty young in that group and looked out for each other as much as we could in the context of working for competing firms. Somewhat recently, he told me a story of how I got into a nose-to-nose shouting match with a broker who tried to bully him when he was new and he never forgot that I stood up for him. I don’t even remember it. Which goes to show that confrontation, despite being uncommon, was still way more routine than most jobs.]
In exchange for time/place and allocation advantages, specialists were expected to maintain “orderly markets”. This means being willing to quote all the option chains for each name assigned to your post (this could easily be 40 stocks). All the strikes, including the deep-in-the-money high delta strikes, where you are more likely to get picked off if your model has the wrong underlying price because the bid-ask in the stock goes wide. There were guidelines about how wide you needed to quote based on how risky the stocks were. The privileges outweighed the burden provided you had enough know-how to price options and navigate different market conditions.
If you were too weak or meek in your liquidity provision duties, the exchange could re-assign your specialist post to another firm. The exchange was sensitive to market share. They wanted strong traders who could price tightly to lure flow away from competing exchanges once options became listed on multiple venues, breaking any single exchange’s monopoly.
The upshot of this storytelling is that option market makers exist at the intersection of statutory privilege in exchange for obligations set at a high bar. If the bar is too low, privileges are granted without a commensurate improvement in market quality, however you care to define that. If the bar is too high, then the privileges are not worth pursuing.
Wherever that bar is set, one thing is certain — the fairness or anti-competitiveness of its product will be debated. Which is fine, but as you’re about to see, the statues are esoteric. It’s not discourse you are used to hearing about. And behind every rule, there is a winning and losing lawyer, both of whom were paid by extremely rich clients.
Let’s examine some privileges, shall we?
[A note on the research: I relied on Claude’s Research Mode to surface citations, but I only chose to focus on items that were salient to my business. I pre-applaud your masochism. This is like reading Warhammer rulebooks.]
I’ll classify the privileges into 2 categories
Moats: Barriers that keep non-MMs from competing away the margins. These barriers have costs.
Time/place advantage: execution advantages that directly generate P&L
If you are a market-maker looking to leave the mothership and start a hedge fund that tries to be a market maker, you might wanna be aware of the “390 rule”.
Any non-broker-dealer customer who averages more than 390 orders per day during a calendar month loses “Priority Customer” status and gets treated as a “Professional”. You are then queued behind Priority Customers and stripped of customer-level fee treatment.
💡Why 390? That’s an order a minute for the 6.5 hours the market is open.
In addition, cancel/replaces count as new orders, complex multi-leg orders may count each leg separately, and brokers must review customer activity at a minimum quarterly and reclassify within 5 business days, while ISE requires aggregation of “obviously connected” accounts to prevent splitting orders across multiple accounts.
The practical implication:
Most obviously, you cannot just stream a 2-sided quotes as if you are a market maker. More subtly, being cast a “Pro cust” loses Priority Customer allocation priority and are treated the same as broker-dealer orders. For the people who did trade on the floor, you might remember the provision that allowed you to not honor your quote for an order that came from a professional broker dealer. The “390 rule” rhymes a bit.
Also, the 390 threshold hasn’t been adjusted since inception despite the explosion in order volume.
Market makers pay for and receive preference for faster pipes. This enables effective market maker “protections”. For example, if you get filled on too many contracts over a small time interval, or take on too many deltas too quickly, the protections kick in and “panic” your quotes (ie widen them way out) because there’s a good chance you’re getting picked off by. Lots of execution software have the ability to tune these settings but they’re only as good as the pipes they operate on.
Risk-based margin using OCC’s TIMS framework. Qualified traders get roughly 6.6-to-1 leverage vs Reg T’s 2:1. For registered MMs, FINRA Rule 4210(a) allows margin on whatever basis is “satisfactory to both parties,” with the binding constraint being net capital haircuts under Rule 15c3-1.
Ultimately this rule gives prime brokers room to innovate on how they account for risk and feels less heavy-handed and more market-based. But it’s something outsiders are less aware of.
This is one I wasn’t aware of exactly but Claude surfaced. Would love if any readers can verify. It’s esoteric but important since the most desirable flow to trade against is usually less than 15 contracts or so.
DMMs receive the first 5 contracts of any order at exchanges where they hold designation. Exchanges almost never reassign DMM seats. This combines with PFOF to produce a self-reinforcing loop: the DMM pays PFOF to brokers, brokers direct flow to exchanges where that firm is DMM, and the DMM captures the guaranteed allocation on that flow.
I thought there were internalization mechanisms that would supersede this but again open to learning.
When an options market maker needs to sell stock short to delta-hedge, they are exempt from the requirement to first locate shares. Instead market makers receive an extended close-out window of T+4 under Rule 204.
If the market-maker fails to deliver:
FINRA has intensified scrutiny on this issue. The 2025 Annual Regulatory Oversight Report warns that merely having an exchange’s market making designation does not per se qualify for the exception. A new reporting requirement as of Dec 2025 will give regulators order-level visibility into which short sales invoke the MM exemption.
Claude identifies the “locate exemption is the single most economically significant MM privilege”.
There used to be a time when the window before your shares were “bought-in” was 13 days. I was strictly in the futures markets in those days but I heard of strategies where MMs would cover then short again to reset the clock. You can basically get away with buying synthetic stock via combos way at big discounts in hard-to-borrow names without getting hit with the big financing fee on the short leg of the arbitrage.
No first-hand experience here, so treat this like gossip.
This one was a pain in the butt as a large option trader in USO but without market maker status.
Standard position limits are tiered at 25,000 to 250,000 contracts based on the net delta option positions.
When USO was a $20 stock, 250,000 contracts amounted to about 5000 WTI futures options contracts which isn’t a huge position when you trade a few thousand lots a day. I can remember needing to build a tool that wpuld compute how many USO options I could trade on one side of the market if a broker showed me a deal. “Well, I got this many expiring Friday, so next week I’ll be able to do the trade, sorry”. I’d even look into trading rev/cons just to free up capacity in case a juicy trade came along I would have enough regulatory lot overhead to do it.
Meanwhile exchange-registered MMs are exempt from the limits.
On most options exchanges, designated/primary market makers receive a guaranteed percentage of incoming order flow when quoting at the best price — independent of how many others are also at that price. This is reminiscent of the specialist or designated market maker system (the CBOE doesn’t have specialists; it has DMMs).
Current allocation rates by exchange (again according to Claude):
The time/place advantage that makes upstairs traders throw their turret through their monitor is the floor market-makers’ right to “break up a cross”.
This is best explained with a scenario.
Let’s say the consolidated screen market for the USO June 100 put is $6.20-$6.90 25×25.
The screen is only “25 up” meaning that’s the full displayed size on the NBBO.
A broker has a customer who wants to pay $6.75 for 1,000 lots.
The broker “shops” the order, calling upstairs option traders, funds he knows are active in the name, or even some commodity market makers.
He gets a hold of me.
I agree to sell 1,000 at $6.75. The client is happy, the broker gets to charge both me as the “solicited order” and the original client commission (the broker is said to have “double billed”— at $1 per contract the broker makes a quick $2k).
High fives all around.
Just one more step. The trade has to be “printed” on an exchange to go on the public tape before it can be submitted for clearing.
Well, the market-makers on the floor know I was solicited to “cut” the market. Even though they are offered at $6.90 on the “wire”, they want to sell at $6.75, especially knowing that the “solicited seller” who is probably a vol trader is offered there. It’s a pretty good trade to sell on someone else’s offer!
So the market makers have a few choices. They can wait until the broker starts announcing the trade, remember the broker needs to represent the bid and offer aloud by announcing “$6.75 bid for 1000, at $6.75. Trades”. Then, market makers pounce, hitting the bid when he announces it. My solicited offer goes unfilled, the broker only gets to bill the original client, and has an unhappy seller on his hands.
This is all quite adversarial and risky. It goes down like this in fiercely competitive crowds. But the normal way this happens is in the context of a repeated negotiated game. The broker understands the market makers have the right to “break up the cross” and the market makers understand that if the broker doesn’t bring flow to this floor as opposed to another, they’ll never eat.
So they haggle.
The market makers might say we’ll let you cross 600 contracts but we want to sell 400. The broker says his solicited seller won’t go for that and he’ll “take the order away to another floor to cross”. The market makers relent, “fine we’ll settle for 20%” and the deal prints.
The market makers have a large advantage. They get the last look. They get to know the solicited trader’s intent. And finally, they get a crazy “free roll”. Let’s say USO tanks in the window of time between when I agree to sell the puts and the broker representing the orders to the floor. The put fair value might jump up to say $7.00 and the market makers not only pass on selling puts but they decide to jump in front of the original customer order and lift my offer paying $6.80. This would be a disaster for the broker. The original client is unfilled and now the puts have run away from them, while I, the solicited offer whom the market makers perceive as a competitor, get picked off. The broker has 2 unhappy customers. Realistically, the broker wouldn’t open themselves up to such a fiasco (although sometimes they happen…there is an amount of money where an iterated game becomes worth sacrificing for single windfall).
You can see how powerful this market maker time/place advantage is. It’s so strong that in the last few years, Citadel started putting market makers on at least the CBOE. SIG always had market makers on every floor so the broker cannot threaten to “take the order away”. SIG is going to make sure it gets its tribute.
Now there are mechanisms for crossing option trades electronically. It’s known as a Qualified Contingent Cross (QCC). It allows the broker to cross the trade without exposing the options leg to the normal auction process, but it must meet specific criteria:
The rule was designed for large institutional hedged trades where breaking up the package would create execution risk, as I described above. The idea is that the stock and options legs are economically contingent. You wouldn’t do one without the other.
The QCC mechanism eliminates the floor traders’ last look advantage but only for orders that meet the criteria. For a live (ie unhedged) option order, you are forced to expose it to either an electronic auction or a trading crowd.
Going from memory, most QCCs print on the PHLX, as they targeted this volume with rebates or monthly fee caps, but again, don’t quote me on that. Even when this is your job, it’s a task to stay on top of all the changing fee schedules.
If you want even more detail, I stepped through some examples in a chat with Jason:
The romantic notion of being a “trader” exists, but it’s a small percentage of those who identify with the title. Market makers are traders who are deeply embedded in a system of privilege and obligation. They operate within an optimization and constraint function that is relatable only in the abstract and incomplete way that any business you are not fully in is.
If you put different people in the same seat, you’ll get different results. But it’s not the absolute p/l that matters, but the VORP. There’s a y-intercept to that seat’s p/l that derives from technology and access that wouldn’t exist at another firm. You can think of the y-intercept of profits like operating margin instead of p/l.
If you don’t believe me, eavesdrop on a manager giving his trading pod henchmen a year-end review. You’re a special snowflake when they recruit you, but a commodity when they pay you.
Hey, at least you didn’t have to take the MCAT.
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