I think it also leaves out that not every market maker wants to be flat instantly. The one I worked for, and at least some of our peers were sometimes happy to hold inventory for a bit when they thought the market would even out.
May I ask if this was before or after GLB (1999, for the kids following at home)? (My experience as a derivative market maker was post GLB and post crisis.)
Managing a flat book is less exciting than placing directional bets. It’s also less profitable, at least when the bets go well. Add to that the complexity of market making, particularly when derivatives enter the equation, and you get the two decades–following the advent of ECNs, turbocharged by GLB and ending in the financial crisis—in which market making desks were proprietary traders first and liquidity providers second.
Also, if you buy a swap and I simultaneously sell stock, there is both a simultaneous trade and liquidity being provisioned in a value-adding way.
> 1) a statement, pattern of behavior, prototype, "first" form, or a main model that other statements, patterns of behavior, and objects copy, emulate, or "merge" into. Informal synonyms frequently used for this definition include "standard example," "basic example," and the longer-form "archetypal example;" mathematical archetypes often appear as "canonical examples."
> 2) the Platonic concept of pure form, believed to embody the fundamental characteristics of a thing.
The confusion between you two seems (to me at least) to fit almost entirely within the difference between those two definition. If you are describing the ideal market maker as essentially performing arbitrage, that seems to fit the second definition pretty well, right?
Meanwhile if wpietri says that most of the work at his believed-to-be-typical example of a market maker was doing non-arbitrage stuff, that'd make sense, right? I guess in most places the main work would be managing the divergence from idealness.