Difference Between Poker and the Stock Market

[pig4bill]

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Perhaps I misunderstood your post. I believe day traders, focusing on a 'very limited number of stocks' do not gain much at all from a long term systematic bias. I just offered the alternative of buying bonds as a less expensive and more direct way to play the US economy.

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Being a market maker is more analogous to table games in the casino than to the rake in poker.

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Nope.

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The casino, or market maker, can lose on any given bet but in the long run EV becomes actual value.

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Market makers don't fade "bets" from investors offering odds that are unfavorable to investors and they don't cut pots either.

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You're correct. Market Makers do not cut pots.

Market makers (in their purest form) provide two sided markets; making their money by buying on the bid, selling on the offer, and scalping the difference. As such, market makers make the most money by finding an equilibrium (or theoretical) price where there are an equal number of buyers and sellers. They then set their bid below this theoretical price and offer above the theoretical price and attempt to attract as much order flow as possible. If there are more buyers than sellers a market maker will 'fade' his(or her) market up in search of this new equilibrium by raising both the bid and offer. If you send a large market order the the NYSE I guarantee the specialist (head market maker) will fade your bet every time and take the EV between the market equilibrium price and the price you are executed at. This difference is the Market Maker's vig. Examples are best seen in illiquid stocks, as their markets tend to be wider, but they trade smaller volume. The purest form of a market maker makes the bulk of his/her money in the same way that a casino does, by taking many small +EV bets (much like a successful poker player).

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That's the way market makers USED to make money. Spreads are usually 1 or 2 cents. These days market makers make their money by out-trading the average trader.