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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.

Market making is about managing risky & unpredictable inventory. Many MMs hegdge to protect themselves, but hedging against every outcome is too expensive. Most MMs use stochastic models to hedge efficiently - they list a range of outcomes & hedge against the most likely ones.

Flow Traders is not most MMs. They hedge using deterministic modeling - they model ONE possible outcome and hedge against that outcome. They predict EXACTLY when the gator will bite.

This way of market making has its advantages, mainly via cheaper, more efficient hedges. But the downside is stark - if their model or research is even slightly off, they protected against the wrong outcome & can lose big. How can a business survive this way?