Firm Types: Market Makers, Proprietary Trading Firms, and Hedge Funds
9 min read
Quantitative trading happens inside three broad kinds of firm, distinguished by whose money they trade, how they earn, and how long they hold. The boundaries blur in practice, large firms often run several models under one roof, but the three templates organise the landscape.
Trade their own capital to quote two-sided prices continuously, earning the spread on flow, the business the markets course took apart in detail. Holding periods run seconds to hours, inventory is recycled constantly, and revenue scales with volume served rather than with directional views.
Trade the partners' and firm's own capital across strategies, market making, arbitrage, short-horizon directional models, keeping all profits and bearing all losses. No outside investors: the constraint on size is the firm's own balance sheet and risk appetite.
Manage EXTERNAL capital for institutional and qualified investors, charging management and performance fees. Quantitative funds run systematic strategies at longer horizons, days to months, where capacity is larger and edges decay more slowly, and their business includes raising and retaining capital, not only deploying it.
The economics, side by side
A making desk nets 0.2 ticks per contract (tick value 12.50) on 40,000 contracts a day: revenue daily, high-frequency, low per-unit margin, capacity bounded by flow. A fund managing 2 billion at "2 and 20" earning a 9 percent gross year:
(Performance fees conventionally apply to returns net of the management fee, with variations.) Same underlying skills, entirely different business shapes: one sells liquidity by the trade, the other sells capital deployment by the year.
The differences cascade into everything downstream. Capital source sets the constraints: own-capital firms answer to their own risk limits and can hold nothing overnight if they choose; funds answer to investors, mandates, and redemption terms. Horizon sets the toolkit: seconds-scale trading is microstructure and technology; months-scale trading is statistics, capacity management, and cost control. And the risk profiles differ in shape, not just size: flow businesses earn steadily with occasional sharp losses in dislocations, while multi-month strategies breathe with markets and are judged in drawdown terms, the profiles this track's statistics equipped you to read.
Quick check
A fund manages 500 million at a 2 percent management fee and 20 percent performance fee on gross returns above the management fee. Gross return is 12 percent. What are total fees in millions?
Quick check
A making desk nets 0.15 ticks per contract at 12.50 tick value on 24,000 contracts. What is daily revenue?
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