Hide Not Slide

Imagine you make a market for gators. When people want to buy or sell these reptiles, they come to you. You make money by selling gators at a slightly higher price than what you buy them for, collecting the difference. You make MILLIONS supporting the booming gator market.

Gator market making is great, but it also has a downside - to make a market you have to keep gators ready to trade at all times. You have to hold inventory of a dangerous wild animal. Gators are unpredictable. And they bite. Hard.

You can buy protective armor to defend yourself, but this armor is expensive. You don't want to buy full body armor if you don't have to. Profit margins are slim, & optimizing for the most amount of safety with the least amount of armor will help save a ton of money.

There are two ways to figure out this safety to profit relationship. One is w/probabilities - you can list all the potential ways & places a gator can bite you, model the most likely of these, & buy armor to protect against those outcomes.

OR, you can approach it more precisely. You can study everything there is to know about the gator - its jaw size, hunger level, muscle strength, even mood & personality. You can know so much about your inventory that you can predict EXACTLY when & where that gator will bite.

Okay, time to explain the metaphor: Obviously, Flow Traders is the market maker. Market hedges are the expensive armor. ETFs are the gator. Re-read the above thread with these roles in mind.