Market Maker

A firm or individual who actively quotes two-sided markets in a particular security, providing bids and offers (known as asks) along with the market size of each. Market makers provide liquidity and depth to markets and profit from the difference in the bid-ask spread. They may also make trades for their own accounts, which are known as principal trades.

Goals

A market maker’s goal is to make money. To do so, they aim to buy low, sell high. They must take a directional view on something.

Vol Market Maker

Vol market makers trade products whose fair value is related to market volatility.

Examples: Options, Variance Swaps, Squeeth

Vol market makers still buy low, sell high, but they buy when volatility is low and sell when volatility is high.

Curvy products give you exposure to vol and are therefore vol products. Due to convexity/limited downside and unlimited update, volatility makes it so that vol products fare better in volatile climates.

Delta Hedging

Vol market makers delta hedge:

• Long vol when realized volatility > implied volatility.
• Short vol when realized volatility < implied volatility.