What is a derivative Market Maker?

Similar to equity or debt market makers – a derivative market maker works for a firm who quotes a buy and a sell price for financial derivatives, hoping to make a profit on the difference. Derivative market makers make a market in derivative products.

Derivatives are financial instruments whose value changes in response to the changes in underlying variables. The main types of derivatives are futures, forwards, options, CFD’s, spread betting and swaps.

The main use of derivatives is to reduce risk for one party through what is known as hedging. The diverse range of potential underlying assets and pay-off alternatives leads to a huge range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities, bonds, interest rates, exchange rates, or indexes.

There are four major classes of derivatives:

• Futures/Forwards, which are contracts to buy or sell an asset at a specified future date.
• Options, which are contracts that give a holder the right to buy or sell an asset at a specified future date.
• Swaps, where the two parties agree to exchange cash flows.
• Spread Betting where you bet on the direction of the underline asset.

If I work in Derivatives Market Making what will I be doing?

When investors and proprietary traders want to trade on leverage (Debt) they will ring you up or place electronic orders and ask you to make them a price. Your job will vary depending on which derivative you are working with.

If you work in a spread betting firm your job will be very much computerised and involve making a leveraged price for traders charging a larger bid/offer spread than the underline market, making margin calls in order to take larger deposits when the customers trade goes against them and accepting and rejecting orders as the underline moves. If you work in a CFD firm most of your time will be spent inputting hedged orders onto a Level 2 screen. (See Benedix Professional Trader Home Study Pack for further details)

Other derivatives such as options and futures allows for buying and selling of the same asset on two markets – the spot market and the derivatives market. Mathematical finance assumes that any imbalance between the two markets will be arbitraged away (Speculators will take advantage of the discrepancy and the market will react). Thus, in a correctly priced derivative contract, the derivative price, the strike price and the spot price will be related such that arbitrage is not possible.

Your job will be to price these derivatives so no arbitrage exists. In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. You will be using computers and your mathematical abilities to price futures and options using various pricing models. Your job is to make a profit through spread and interest.

You will spend most of your time in front of a number of screens on the phone.

How do I get a graduate scheme / internship / entry level job or career in Derivative Market Making?

Obtaining a graduate scheme, internship or entry level role in derivative market making can be very challenging and competitive – though very achievable by getting your application, CV, interview and general approach right. You can guarantee that ninety percent of applicants for derivative market making roles will not know how to apply, so getting your application in the top ten percent makes things a lot more achievable.

Approaching the company in the right way will make all the difference. Combining the right approach with a strong interview (and in some cases assessment centre) writ a strong focused tailored CV will go a long way. Make sure you have gone through the free videos on this sight by entering your name and email address in the top right of this screen underneath the video. Once you have filled this in you will have instant access to everything you need to secure your career in derivative market making.

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