4. A Brief History of Market Making
From men in colored jackets shouting in pits, to algorithms quoting in microseconds, to community-owned vaults quoting on-chain. Click each event to expand it.
Part I · Chapter 4
What the history teaches
Three lessons repeat across a century:
- Liquidity provision migrates to whoever has the best technology and the lowest cost of risk. Specialists lost to electronic dealers; dealers lost to HFT firms; on-chain, the same race is rerunning at high speed (Wintermute, GSR, Jump Crypto — and protocol-owned vaults like Hyperliquid's HLP).
- Market makers have no obligation to stay. The old NYSE specialist had an affirmative duty to quote; modern electronic MMs don't. The 2010 Flash Crash showed what happens when they all step back at once: the SEC/CFTC report found that in 14 seconds, HFTs traded over 27,000 E-mini contracts — about 49% of volume — while accumulating almost nothing net, a hot-potato cascade against stub quotes at $0.01 and $100,000.
- Microstructure rules decide who profits. Eighth-ticks (Christie–Schultz), decimalization, maker-taker rebates, payment for order flow ($3.8B paid to brokerages in 2021; Citadel Securities, Virtu and G1 handling ~80%+ of US retail equity orders), Kalshi's parabolic taker fee, Polymarket's reward function — the rulebook is the terrain, and every chapter of Part III is terrain analysis.
Where you fitYou will not out-race Citadel on Nasdaq or Wintermute on Binance BTC/USDT. The history's actionable corollary: pick venues where the terrain is young and the competition thin — exactly why this book ends in prediction markets and on-chain perps.
3. What Is a Market Maker?
A merchant of immediacy: always willing to buy, always willing to sell, and paid the spread for never saying no.
5. The Two Fears: Inventory Risk & Adverse Selection
Why does a spread exist at all? Two Nobel-grade answers: because holding things is risky (Ho–Stoll), and because some of your customers know more than you (Glosten–Milgrom, Kyle).