Some time ago, I conducted an analysis of futures and options using OCC data, specifically aiming to understand the distinct role of market makers for both financial instruments.
From your perspective, could you confirm my interpretation or not?
These participants are what are typically described as the “sell side” of the market. Though they may not predominately sell futures, they do design and sell various financial assets to clients. They tend to have matched books or offset their risk across markets and clients. Futures contracts are part of the pricing and balancing of risk associated with the products they sell and their activities. These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives."
In my interpretation, these are the participants who use S&P 500 futures (which is my benchmark market in this analysis) as a hedge for their regulated activities in the equity market, where they are legally designated. In this regard, I have noticed over time a negative correlation between the net positions of market makers and asset managers.
Retail traders (like me) come up with many ideas, sometimes original, other times repackaged as new but actually old. However, the disadvantage of retail traders (i.e., cost, infrastructure, and expertise) is overwhelming.
In my opinion, what is left for the retail trader is to honestly assess how to improve upon the benchmark's performance based on his own personal utility curve, while trying to minimize execution costs. To use a simple example: I can improve the drawdown, or I can turn a bearish period into one where I still achieve a positive return, but I will pay for it with lower returns during the years when everyone else, including the benchmark, outperforms me. But since I am not a fund manager, I won't get fired for this.
And what I have noticed is that, at the retail level, a simple strategy can often outperform a machine learning algorithm.
https://themarketjourney.substack.com/p/market-makers-in-options-and-futures
Some time ago, I conducted an analysis of futures and options using OCC data, specifically aiming to understand the distinct role of market makers for both financial instruments.
From your perspective, could you confirm my interpretation or not?
Thank you very much.
Thanks for reading this and engaging with it. I have dropped my thoughts into your comments.
Thank you very much for your time. Your comment on my article was highly valuable, and I consider it a very fair clarification regarding what I wrote.
Regarding the COT, the TFF's definition of a Market Maker is as follows:
https://www.cftc.gov/sites/default/files/idc/groups/public/@commitmentsoftraders/documents/file/tfmexplanatorynotes.pdf
"Dealer/Intermediary
These participants are what are typically described as the “sell side” of the market. Though they may not predominately sell futures, they do design and sell various financial assets to clients. They tend to have matched books or offset their risk across markets and clients. Futures contracts are part of the pricing and balancing of risk associated with the products they sell and their activities. These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives."
In my interpretation, these are the participants who use S&P 500 futures (which is my benchmark market in this analysis) as a hedge for their regulated activities in the equity market, where they are legally designated. In this regard, I have noticed over time a negative correlation between the net positions of market makers and asset managers.
Retail traders (like me) come up with many ideas, sometimes original, other times repackaged as new but actually old. However, the disadvantage of retail traders (i.e., cost, infrastructure, and expertise) is overwhelming.
In my opinion, what is left for the retail trader is to honestly assess how to improve upon the benchmark's performance based on his own personal utility curve, while trying to minimize execution costs. To use a simple example: I can improve the drawdown, or I can turn a bearish period into one where I still achieve a positive return, but I will pay for it with lower returns during the years when everyone else, including the benchmark, outperforms me. But since I am not a fund manager, I won't get fired for this.
And what I have noticed is that, at the retail level, a simple strategy can often outperform a machine learning algorithm.