How do market makers make money?

Market makers are the counterparty to your trade. They are why you can buy/sell anytime you feel like. Market makers need to make money too.

I will be writing about retail Forex market makers. Retail Forex has no exchanges, i.e. there is no single order book where the traders are required to place their orders. Instead, retail forex orders are fulfilled using a variety of means. Everything that ranges from bucket shops to CFDs to money changers to actual EOD transfer of currency is used to fulfill your trade. Your trade may not be fulfilled by your broker and other clients of the broker. Instead, your trade may get taken to a liquidity pool or a pool of liquidity pools where it is matched with other orders from other brokers. But somebody still has to be a counterparty. i.e. there are entities who are always available to be your (often times only) counterparty, no matter what the market conditions are. They are the market makers. (Contrary to popular belief, market makers exist even on ECNs).

People believe market makers to be this weird magical entity who by the sheer power of deep pockets and mathematics can always stay in the market even if the world is ending.

While it is true there is a lot of math behind the optimal way to make a market involving detailed studies of market microstructure and likes, the basic philosophy behind market making is to “make money”. Market makers typically make money in three ways:

  1. Commissions: Market makers charge a fee for creating liquidity e.g. they charge say 3.5 USD per 100,000 base currency traded.
  2. Spread: Market makers buy and sell the currency at different rates at the same time. This is what money changers and retail bankers do.
  3. Actual trading as described below.

All market makers while creating liquidity also seek liquidity from you and me. All market makers set up shop i.e. set the bid/offer prices at price points where there are more trades happening.

However, market makers cannot afford to forever buy from us when everyone is selling. They will go bankrupt if they try this. As soon as the majority of the traders start selling, the market makers move to their bid/offer prices to our collective stop loss levels where we are willing to buy back from the market makers at a loss.

Why do market makers seek the majority trader’s stop-loss regions instead of majority trader’s take-profit prices? Do they hate us? Isn’t that unfair? Answer: Market makers seek the majority’s stop-losses and set up bid/offer prices there because stop-losses are closer to order-opens than take profits. In fact, market makers do not know/care if an order is a stop loss or a take profit. They simply move to price regions where there is liquidity and make sure they don’t go knee deep into any position in their inventory. They try to keep their inventory position-neutral over long periods of time.

What happens when there is new information in the market, and when the majority of the traders are right, and the market makers do not have enough time to move their bid-offer gap to the price reflected by the new information? Don’t market makers lose money here? Answer: This is where the money made from commissions and spread come into play to help. Income from commissions and spread help market makers offset such losses. Market makers also do not offer infinite liquidity at the current bid-offer gap. In fact, the liquidity offered at the current bid-offer gap is very thin, and the gap moves as soon as an idiot/informed trader tries to act. When new information creeps into the market, losses from sudden trading pressure can be offset by moving the bid-offer gap and using the earnings from commissions and spreads.

How to beat the market maker? Answer: You can’t. Their roles are structured in such a way that they cannot lose. They will either make money off of you or if you are too good, they will make money off of other sheep in the market. You can only make money off other traders, not a good market maker. You would be better off thinking of them as a service/utility that provides liquidity when you need it.

How to beat other traders? Answer: You have to stay away from placing your stop losses in price regions where everyone places their stop-losses. That is where market-makers go to make their inventory position neutral. But that doesn’t mean you have to keep your stop-losses further away from your order-open prices. If you do that the expected value of your trade goes down, and the risk of ruin becomes an eventual certainty. Ideally, you should enter the market when everyone is stop-losing after there is new information in the market, so by the time they are all stop lossed and the bid-offer moves to the new price that reflects new information, you would have made money.

Be careful, though, if you get too good at making money and your broker lets the market maker follow your trades, your trades will be factored in as a new information in the market that affects the bid-offer price.

How propaganda works

I will explain how one type of propaganda works, and then extend it to cover all forms of propaganda.

How loudspeaker propaganda conducted by South Korea against North Korea works:

People usually think all the loudspeakers plays are kpop songs and downright propaganda. If you look more into it, the loudspeakers are a carefully crafted psychological warfare.

The initial announcements start with weather reports. Accurate weather reports that the NK neither has the manpower nor the computing power to gather and spread along the DMZ. This naturally convinces the NK soldiers to rely on the loudspeakers, if not for news and entertainment, for the weather. After some time, we can literally announce “DPRK soldiers, heavy rain is expected to fall in the evening, so please gather your laundry from the clotheslines” and they will come out of their little posts and start gathering their laundry. This is good rapport. Then come just vanilla news. Maybe the results of a soccer match or some shit that happened overseas. They might not believe it, but they’ll find out in a week or when they read or hear it on some DPRK state media. They then subconsciously establish that the loudspeakers have fast, accurate news. Besides, the general NK population and common soldiers rarely ever get international news, if at all. So any international news is a mindfuck to begin with. Then the loudspeakers broadcast NK news. For example, they’ll report that General X, Y, and Z were executed by their glorious leader KJU for whatever petty reason he kills people for. There is good chance many soldiers at this point would write this off as propaganda, but when they eventually hear about it through their own channels, that Gen. X,Y, and Z actually were executed for treason or whatever, you’re starting to fuck with their minds. Then we tell them how fucked up and idiotic the Kim family have been and are.

Another crucial function of these broadcasts is they report news that the DPRK state media censors. And this is absofuckinglutely critical and what bugs NK the most. For example, there was a huge explosion at an NK train station in 2004. Naturally, NK censored the shit out of the event. But the loudspeakers reported on the event, and soldiers at the DMZ wrote home asking if everyone was alright since the explosion was so huge. The loudspeakers nullified NK media censorship just. like. that.

Then they play kpop songs in between the news for entertainment. And this cultural infiltration is so effective, NK soldiers literally sing these kpop songs to congratulate fellow soldiers when they’re done with their service. And mind you, singing those kinds of songs in Pyongyang can put you in a concentration camp in a heartbeat.

The loudspeakers reach about 7~8 miles during the daytime, which definitely covers the DMZ, and at night can reach up to 15~18 miles, which reaches Kaesong (home to the Kaesong Co-op industrial complex), a pretty large city that has a pretty sizeable civilian population (approx. 200,000).

Hundreds of soldiers and thousands of civilians that have defected have cited the loudspeakers as a crucial role in their decision to come south, and NK absolutely despises the loudspeakers because it is such an effective tool against their soldiers, and naturally disrupts their populace by bypassing their media censorship. It pisses them off so much, they are willing to fire 2 rockets across the DMZ and are now demanding a complete stop to these loudspeakers in 48 hours or risk total war.

How all propaganda works:

By extension all propaganda has 3 steps:

  1. Earn legitimacy by telling useful truths and creating genuine entertainment.
  2. Alternate subversive messages (truths & opinions) with useful truths and entertainment.
  3. Improve the range of coverage without annoying people.

These steps can be modified to be more powerful this way:

  1. Take over or infiltrate or subvert an existing source of legitimacy or genuine entertainment which is already popular. e.g.
    1. Trustworthy newspapers,
    2. Famous editors and editor boards
    3. Famous journalists.
    4. websites,
    5. scientific journals,
    6. good movie/TV programs,
    7. good actors
    8. good directors
    9. good production companies
    10. Awards & prizes: Nobel Prize, Oscars, Movie Reviews, Reviewers
  2. Alternate subversive messages (truths & opinions) with useful/entertaining content.
    1. An allied editor finds an innocent journalist who happened upon a scandal regarding an undesirable person. Allow it to be printed on the front page.
    2. Give Nobel Prizes to people who you wish to be considered respectable.
    3. Give Oscars to movies that support your narrative.
    4. Let allied reviewers review bad content as good if it supports your narrative.
    5. Don’t forget to occasionally publish the truth and genuine entertainment or subverted channels will become boring or annoying soon.
  3. Invest in technology and marketing to improve outreach of subverted channels of legitimacy and entertainment.

Tips for subversion:

  1. The economy of subversive methods is paramount because an organization with too many subverted participants tends to breakdown through whistleblowers.
    • For example: Never try to subvert/replace journalists. There are too many of them. Only subvert/replace editors and directors of a news/entertainment organization who are far fewer in number.
    • Another example: Fame is mistaken for legitimacy, and there are fewer famous people than their fans, and even fewer agencies representing said actors, so infiltrating the ownership of talent management agencies is very good way to put words in the mouth of famous people.

I sense benevolence limited by neccessity

There are fewer parts that make up a single mind, than all the parts that make up the entire universe with at least a few billion minds in them.

Yet we do not find ourselves to be a mind without the company of the universe and the proximity of other minds within it. We have company. It brings us suffering sometimes, but most of the time the company of other minds and the universe is beneficial. It helps us collude our lesser abilities to make something better than us.

Due to all these truths, I sense a certain benevolence behind everything. But this benevolence is not unlimited or omnipotent. I sense that it is limited, and all it did was the best it could so that we could be without much suffering.

Or perhaps, this is the only solution to the problem of being and awareness of being. This is perhaps the only way everything can be. And occasionally everything comes together to be this way.

Women and travel

Most modern women like to travel. They like to meet men who like to travel. I’ve noticed most women like to travel in an elite luxurious way, by flying in a chariot in the sky/sea, staying in a Potemkin village and eating “authentic” gourmet meals which the locals do not eat. There are women who like to traverse the seas in a sailboat or visit a tropical forest or a desert, but they are the exception.

Finding a man who loves to travel is just a subtle way of saying they want a man who is upper middle class (or higher) with a good job, good health, and good education. Generally, poor people, sick people, people who work jobs where they can’t get time off, etc. can’t travel.

Travelling as a woman in modern times is a great way to escape the responsibilities of living like having a job and being productive. It is all about consumption and intake. It increases status, for showing off and telling her friends. It also is great for social media, which women use to keep score on status.

There can be purpose

I had a dream last night about you-know-who. I just walked past with my friends, and my friends went with YKW. I walked forward rubbing through the twigs on a tree, and YKW left too.

I realized that there can be purpose in the world. And the secret to finding purpose lies in that feeling which is unique in qualia among all qualia I’ve known. I don’t want to give it a name. Names are misunderstood.

I need a similar qualia for my other values, while retaining my grasp on statistical nature of it all.

Panama papers shrunk from 2.6 TB to 210 MB

2.6 TB of files leaked by Goldman-Soros-Ford-Rockefeller-funded “The International Consortium of Investigative Journalists” is now available for download here.

Except that, the files are only 210 MB!! (uncompressed). This is because the database only contains objects like Entities, Intermediaries, Officers and Addresses, and lines connecting them (CSV export of a Neo4J DB to be precise). Much like a “Crazy Wall”:

e3c0a7fdb5e4c5747e1119e2328d3e08

Unlike a real crazy wall, however, the raw files are not stringed together. It just names people and organizations, and their addresses stringed together.

Essentially it is just a hit list of names which ICIJ want to smear without providing any evidence.

I wouldn’t be surprised if the raw 2.6 TB of files is never shown to the public detailing the nature of the connections between these names. I wouldn’t be surprised if many names friendly to the Goldman-Soros-Ford-Rockefeller cabal was left out from these lists. If we had the raw files we could find out using something called Named Entity Recognition. But I guess only the Ministry of Truth is allowed to look at actual evidence, interpret it for us, and name names.

Good is just evil with better publicity

This is the corollary of “all evil is done with good intentions”.

Even unsustainable plans like “let us kill all the people” can be dressed up to be palatable and politically correct.

In fact I’ve yet to see to any form of genuine good. It is just evil interacting with evil, and certain evils winning out.

All forms of evil that win, have better publicity. This is why marketing and sales are more powerful than I earlier imagined. It makes the despicable and disgusting tasty.