Aaron Brown, MBA Finance & Statistics, The University of Chicago Booth School of Business (1982)
Answered 1 year ago · Author has 13.5K answers and 30.6M answer views
The easiest profit for a market maker is to buy from a seller at the bid price, then quickly turn around and sell to a buyer at the ask price. But it’s the nature of the business that sometimes you build up positive or negative inventory. If it gets large you can hedge it, or you can lay it off in which case you pay the bid/ask spread instead of earning it.
Different market makers have different risk tolerances. Some will take large positions and hold them for days, others want to be near flat all the time, and always flat at the end of the day. The big market makers all hold substantial position overnight, but many smaller ones do not.
“Algorithms” can mean computer programs for executing orders. Many of these algorithms can extend orders out for many days or weeks. For example, if a large institutional investor wants to sell millions of shares, it might well allow its algorithm to break it up into many smaller orders of different types over weeks. But for smaller amounts the same algorithm might do all the trades in one day.
“Algorithms” can also mean systematic trading strategies—as opposed to order execution. Some systematic trading strategies have horizons of fractions of a second (high-frequency trading), some minutes or hours (rapid trading), some a day or days; but most of the large dollar ones take positions over weeks or months, sometimes longer.
