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Market Makers, Stabilizing or Disruptive?

In: Market Tremors

Author

Listed:
  • Hari P. Krishnan

    (SCT Capital)

  • Ash Bennington

    (Real Vision TV)

Abstract

In this chapter, we will describe how options market makers or “dealers” can dominate price action over multi-day horizons. While they might not have large balance sheets, these agents take at least one side of a large percentage of trades that go through the market. When prices approach levels with significant options open interestoptions open interest, they can suddenly transform into Dominant AgentsDominant Agent. In particular, market makermarket makers hedging can cause distortions in distribution of short-term returns. Volatility has the potential to either compress or explode: it all depends on positioning in advance of the move. With this in mind, we study stock pinningstock pinning as an example of stabilizing behavior and downside index hedging as a mechanism for increasing the violence of sell offs and the speed of short-term rallies.

Suggested Citation

  • Hari P. Krishnan & Ash Bennington, 2021. "Market Makers, Stabilizing or Disruptive?," Springer Books, in: Market Tremors, chapter 0, pages 159-199, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-79253-4_6
    DOI: 10.1007/978-3-030-79253-4_6
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