I'm trying to get a little more educated about the other active participants in my universe (NYSE listed ETFs and CEFs), so I've begun to look at L2 data that displays Market Maker information. I expected to discover that one (or more) MMs were consistently making a reasonably tight market in specific funds, and further thought I could learn something about where their inventory position may be by the spreads they quote.
However, what I found was that in every case I checked the MMs (firms like susquehanna, Citadel, Knight, G1, etc...) "made" a market that was ludicrously wide - like a 10-15% spread. In a few cases, half their market would be somewhere in the neighborhood of the inside, but never both. And by close, I mean within 100bps which is far enough away that I expect it only gets filled in a flash crash type event.
The one exception would be Timber Hill which is typically closer than others. Rarely at the inside, but close enough that I could imagine them actually trading. The NBBO in all cases was set by the MM listed as "Nasdaq Execution Services" which I'm guessing is simply how limit orders on the exchanges get represented.
I understand the (theoretical) role of MMs in the market, and I know that all of these firms do massive volume so I'm confused as to why the L2 data doesn't show anything more.
Is this the expected behavior? Some sort of vestige of an earlier era? Are the MMs direct routing their volume to the exchanges, effectively masking their B/A orders under the NSDQ alias? Why do these firms keep stub orders on the board? What kind of benefit do they get, other than the once-in-a-long-while flash crash freebie?
Is there any other viable way to determine which MM(s) are active in a given NYSE listed security?
Thanks in advance. I'm really looking to understand why reality isn't matching with theory
As an aside but covering market makers, this webinar may be useful:
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