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Dynamic Hedging, Gamma, and Market Maker Flows at the Index Level

Market Maker flows would seem to be a good place to research.

While many of us loosely use the word predictive, our strategies that exclusively use past data for models inherently make them unpredictive by definition. The past does not predict the future.

However that may be, Market Maker flows are predictable. We do not use past data to generate a predictive model. Based on existing positions, we know the future outcomes. Market Makers acknowledge they dynamically hedge and the exchanges provide the actual data with the current Market Maker positions. Therefore, their deltas can be known. We know when they must buy and when they must sell. This is because dynamic hedging is a known system with known math. Positions are opened, and these positions must be eventually closed in a known time. They must be hedged. They are systematic.

If we know the value of the parameters into the hedging, by definition it is predictive. We know the answer based on the parameters. We do not need to wait for the system to execute to know the behavioral outcome of that system.

The discussion about exchange data quality is very salient to this problem.