Trading Firm Revenues

Main categories are:

• Market making/providing liquidity: Trading firms make money by continuously quoting bids and asks in the continuous intraday market.

• Forecast-driven systematic/directional trading: They use forecasting, modelling, etc. to take directional positions in different spreads, such as:

  • day-ahead vs intraday spreads

  • intraday vs imbalance spreads

  • cross-border spreads

  • time spreads

  • granularity spreads

  This is mostly prop trading, meaning without assets; however, it can be asset-backed too, because having assets is greatly beneficial since those assets can be used as hedges for closing positions, lowering overall risk.

• Asset optimization: Trading firms manage their own assets or do asset management for their clients. This basically means using forecasting and optimization to squeeze as much value as possible out of the assets by looking for opportunities in all markets.

Note that in both 2 and 3, assets can be used as hedges for closing positions, adding flexibility, hence lowering risk.