Curriculum·Graduate·G501
Market Making and Liquidity Provision
Ronin Capital, March 2020. Ronin was a proprietary trading firm and market maker that stood ready to buy and sell across many markets, and in the extreme volatility of mid-March 2020 it took losses that left it, in the CME's words, unable to meet its capital requirements going forward.
Lesson 1 opens on
Ronin Capital, March 2020
Ronin Capital was a proprietary trading firm, once the largest proprietary trading name in Chicago's futures markets and a direct clearing member of CME Clearing, holding a large book of positions, and in the extreme volatility of mid-March 2020 it took losses that left it, in the CME's words, unable to meet its capital requirements going forward. On March 20 CME Clearing auctioned off Ronin's portfolios to other firms, and the same day FICC, the clearinghouse for US Treasury trades, ceased to act for Ronin under its rules. Ronin had no customer business, so no customers were affected and the CME guaranty fund was untouched, and by August 2020 the firm was withdrawing the licenses it needed to trade.
The lessons
- G501-01Making markets means carrying inventory riskExplain that a market maker holds inventory in order to earn a spread, and that inventory carries riskabout 34 min · opens on Ronin Capital, March 2020
- G501-02The spread is payment for risk, not a free lunchExplain that a market maker's legitimate income is the spread earned for bearing riskabout 34 min · opens on Optiver, 2007 (settled 2012)
- G501-03How a market maker handles your orderExplain that a retail order is often routed to a market maker that profits from filling itabout 34 min · opens on Citadel Securities, 2017
- G501-04Risk controls at machine speedExplain that a market maker trading at machine speed accumulates risk at machine speedabout 34 min · opens on Latour Trading, 2014