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Offline xeroc

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How's the MarketMaker supposed to earn profit?
« on: October 21, 2014, 02:38:43 PM »

Can someone please explain to me how the "market maker" in .. say bitUSD/BTSX is supposed to *earn* money?
From what I understand, the marketmaker earns profit no matter the direction of the market ... but could in theroy earn more when bet on one side of the market instead ..

Could someone elaborate the market maker (in regards to the market maker bot of BM and toast) please?

Thanks
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Offline santaclause102

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Re: How's the MarketMaker supposed to earn profit?
« Reply #1 on: October 21, 2014, 02:53:21 PM »
1) Buy cheap BitUSD and sell them again when enough others have done the same
and/or
2) Predict the direction of the market (usd/btsx), including inaccuracy of the median price feed.

Offline monsterer

Re: How's the MarketMaker supposed to earn profit?
« Reply #2 on: October 22, 2014, 08:16:07 AM »
From what I understand, the marketmaker earns profit no matter the direction of the market ... but could in theroy earn more when bet on one side of the market instead ..

This is a fallacy, otherwise all traders would be market makers across the world and no one would lose money. The problem is adverse selection - when, say your buy order gets filled and then the market moves downwards, never filling your sell order; or visa versa.

I describe the problem in more detail in a couple of articles I wrote:

http://www.wildbunny.co.uk/blog/2014/06/11/algorithmic-trading-with-bitcoin-part-1/
http://www.wildbunny.co.uk/blog/2014/06/24/algorithmic-trading-with-bitcoin-part-2/

Cheers, Paul.
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Offline starspirit

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Re: How's the MarketMaker supposed to earn profit?
« Reply #3 on: October 22, 2014, 08:58:32 AM »
Can someone please explain to me how the "market maker" in .. say bitUSD/BTSX is supposed to *earn* money?
From what I understand, the marketmaker earns profit no matter the direction of the market ... but could in theroy earn more when bet on one side of the market instead ..

Could someone elaborate the market maker (in regards to the market maker bot of BM and toast) please?

Thanks
As a clarification, market makers do not always earn profit, they have risk of loss like in all speculative endeavours. This risk is the market trend causes adverse revaluation on the inventory of BitUSD and BTSX they need to hold. The market maker aims for the spread (less trading cost) times their turnover to more than compensate them for this risk. The key in my view is to ensure that you are making a market around the level the market is most liquid at, not necessarily the peg level. though I'm more confident these will get closer in future. I haven't looked at the bot and how it works, so can't comment on that.

Offline xeroc

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Re: How's the MarketMaker supposed to earn profit?
« Reply #4 on: October 22, 2014, 09:02:16 AM »
This is a fallacy, otherwise all traders would be market makers across the world and no one would lose money.
Thought so :) -- Most obvious thing in trading .. That's why I wondered

The problem is adverse selection - when, say your buy order gets filled and then the market moves downwards, never filling your sell order; or visa versa.

I describe the problem in more detail in a couple of articles I wrote:

http://www.wildbunny.co.uk/blog/2014/06/11/algorithmic-trading-with-bitcoin-part-1/
http://www.wildbunny.co.uk/blog/2014/06/24/algorithmic-trading-with-bitcoin-part-2/

Cheers, Paul.
Actually, I already read those articles .. I like them .. nice overview ..


Still .. what's the marketing_maker bot
https://github.com/freetradebots/btsx_bots/blob/master/bots/market_maker.py
doing exactly? and how can that bot gain profits?
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Offline monsterer

Re: How's the MarketMaker supposed to earn profit?
« Reply #5 on: October 22, 2014, 09:24:42 AM »
already read those articles .. I like them .. nice overview ..

Still .. what's the marketing_maker bot
https://github.com/freetradebots/btsx_bots/blob/master/bots/market_maker.py
doing exactly? and how can that bot gain profits?

Cool!

Erm, looking at the code it's placing two order either side of the price feed with the spread being some percentage value. Simple market maker. Would be surprised if that is profitable long term.

Market makers make little amounts of money constantly in mean-reverting markets, then when a strong trend occurs, they tend to lose it all and then some.
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Offline xeroc

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Re: How's the MarketMaker supposed to earn profit?
« Reply #6 on: October 22, 2014, 09:35:56 AM »
Cool!

Erm, looking at the code it's placing two order either side of the price feed with the spread being some percentage value. Simple market maker. Would be surprised if that is profitable long term.

Market makers make little amounts of money constantly in mean-reverting markets, then when a strong trend occurs, they tend to lose it all and then some.
Thanks for you honest reply ...

Mind reading through the other bot I wrote:
https://bitsharestalk.org/index.php?topic=10131.msg132190#msg132190
Code:
https://github.com/xeroc/btsx_bots/blob/master/bots/market_balance.py

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Offline monsterer

Re: How's the MarketMaker supposed to earn profit?
« Reply #7 on: October 22, 2014, 09:55:00 AM »
Thanks for you honest reply ...

Mind reading through the other bot I wrote:
https://bitsharestalk.org/index.php?topic=10131.msg132190#msg132190
Code:
https://github.com/xeroc/btsx_bots/blob/master/bots/market_balance.py

Not to sounds disparaging, but the theory (from wikipedia) sounds a little like voodoo, with terms like 'overweight' and 'underweight' used with no explanation of how you might arrive at these definitions.

In general, 'real' trading algorithms start by defining a model (or set of models) of the market they trade in, then they define a set of mapping functions used to approximate the behavior of the market. They use these mapping functions to help predict the future direction or behavior of the market given current estimates, submitting current data into their model to get a decent most probable outcome.

That way they don't suffer from the problem of lagging indicators, which you'll hear everyone complaining about in metatrader (which is a toy platform).

However, these 'real' trading algorithms are usually built by huge firms with 100s of PHDs in total secrecy. Every now and again, (when an algorithm stops being profitable) the firm will allow a paper to be written on the subject which you'll be able to google and read, implement and find it doesn't work, lol.

Cheers, Paul.
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Offline xeroc

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Re: How's the MarketMaker supposed to earn profit?
« Reply #8 on: October 22, 2014, 10:06:18 AM »
However, these 'real' trading algorithms are usually built by huge firms with 100s of PHDs in total secrecy. Every now and again, (when an algorithm stops being profitable) the firm will allow a paper to be written on the subject which you'll be able to google and read, implement and find it doesn't work, lol.
How come this reminds me of mining hardware manufacturers.. lol

Thanks for the insides .. I am pretty sure .. writing trading software is non of my business :) -- I'll stick with engineering then :) .. Still interesting to see how trading software works ..
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Offline monsterer

Re: How's the MarketMaker supposed to earn profit?
« Reply #9 on: October 22, 2014, 10:14:01 AM »
How come this reminds me of mining hardware manufacturers.. lol

Thanks for the insides .. I am pretty sure .. writing trading software is non of my business :) -- I'll stick with engineering then :) .. Still interesting to see how trading software works ..

Don't be put off - if you can find a market inefficiency, exploit it. It's better to start of exploring this by trading by hand, though.
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