Do market makers in practice really hedge SPX and ES options in SPY or does the reverse occur often?
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Prob silly Q, but why cant you use cash to buy SPY? Why would you need financing from broker? Very insightful. Broker spread drives cost of carry. Anything that offsets the benefit of futures? Since they have certain risk SPY itself lacks right?
The delta you need to hedge may be larger than your unencumbered cash balance (plus you are probably not just trading one market, there will be many demands on the same $ of capital -- if at a bank, your desk will get charged by treasury for its capital usage)
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The way that every place I have been at worked was that all cash not required for exchange or broker margin was invested in treasuries and/or money market funds, and leverage was obtained via derivatives, broker financing or repo.
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Everything's great on the desk at the end of the quarter until someone realizes the junior responsible for PnL forgot to include treasury fees.
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