Sizing a market maker's daily take

Question

You run a book that round-trips about 40{,}000 shares of volume per day (i.e., 40{,}000 shares bought and later sold), capturing a net 3 cents of spread per share after adverse selection and fees. What's your expected daily P&L, and annualized? What does the structure of this number teach about the business?

Accepted Answer

Daily capture. Net spread times shares traded: 40{,}000 	imes \0.03 = \1{,}200 	ext{ per day.} Annualized (about 250 trading days): 1{,}200 	imes 250 = \300{,}000 	ext{ per year} 	ext{ on this single book.} What the number teaches. The margin per share is tiny, 3 cents, and the whole business is built on doing it many times. Revenue is the product of three levers: 	ext{P\&L} = (	ext{net spread per share}) 	imes (	ext{shares per day}) 	imes (	ext{days}). - Volume is the engine. Doubling flow to 80{,}000 shares/day doubles the take to \600{,}000/yr with the same thin margin. This is …

Sizing a market maker's daily take

Your answer

More Market Making questions