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under some agreement, generally very favourable pricing if they are taking risk off the central book and less favourable if they are adding risk. These books can be run be completely independent teams which reduces coordination problems and IP leakage risk.
Now whenever a prop book thinks the price is going up they buy from the MM book which leaves the MM book short, they therefore skew their prices up to encourage others to buy from them and cover the short. The prop book alpha is transmitted to the MM book.
This simple but elegant mechanism solves many of the scaling problems inherent in running a MM firm. It is also why it is a mistake to think that you can “run over” a big market maker by trading heavily in one direction with them — they are capable of leaning
against or following your flow in their prop books depending on where they think the market is going. Fin.
“... sell to them ...” ?
If MM gets short, skews up to encourage others to *sell to them* (covering short; “buy from them” would make them even more short), how does the alpha xfer? MM side sold short and had to cover at increased price. Meanwhile prop now sitting on gain - kept alpha. Right?
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