I have started to think the market is a competition among not just traders but different leverage capacities. A group of traders attempt to detect a signal or edge in the market. The most professional, fastest, and largest among them rapidly arbitrage that edge away. Slower less nimble traders attempt to take advantage of the same signal with increased leverage. But, who is taking the other side? The sneaky market maker. They are taking the other side with low leverage with the anticipation that because most of the edges are going to be arbitraged away anyway that any bias from such an edge will be small in relative terms. They just need to average down with some minimum of intelligence with key word low leverage and wait for a reversion.
What do you think? Is this the right model? Or is it this model:
The market maker is keeping out large size and profiting from the spread enough times to offset the losses when the market moves against them then they take a loss but they captured the spread enough times to offset that loss.
Or is it this model?
The market maker is controlling large enough size to run the stops of short term speculators. The ability to control large size on both sides of the market gives them super normal insight into the order book dynamics and provides for possibility to advantage the deck in their favor.
What do you think? Perhaps, there are traders using all forms of these models and more.
The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at email@example.com.
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