on
How To Run A Bar
how market makers work
incomplete / draft
Imagine a man in a bar. He looks up to order a beer and notices something strange. Written next to the Miller Lite he wants to order there are two prices; $3.00 and $3.10. He asks the bartender if there some kind of special, or perhaps a mistake on the menu. "No mistake" the bartender answers, "If you want a Miller Lite it costs $3.10. But, if you want to sell me a Miller Lite, I'll buy it off you for $3.00."
"OK, I'll take a Miller Lite," he says.
"Is $3.10 all right?"
"Umm sure," he says glancing back up at the prices as he is handed a cold one.
Strange bar indeed.
He notices that his friend sitting next to him is holding 6-pack of Stone IPA.
"So I guess you are going to sell that?" he asks.
"Yep" she says.
He looks up a the board and finds the Stone IPA prices.
"It looks like you'll get $5 a piece for them."
"Yeah, but I want more."
"You can't just ask for more."
"Sure I can," she smiles
She hands the bartender a note saying that if he's ever paying $5.50 for Stone while she is still here, that she'd sell hers.
The man looks around and realizes that there are actually quite a few people walking around with unopened beer as well as quite a few thirsty-looking people at the bar that apparently have not gotten the price they wanted yet.
"Why would anyone agree to pay more than what they could get for a beer? Like, why don't the people just trade the beer with each other and save on the difference?" he asks his friend. She swivels around on her chair.
"Do you know her?" she asks.
"Who?"
"The lady by the pool table holding a 6-pack of Miller Lite."
"Never seen her before in my life."
"Exactly. So you could go finding people each time you want a beer, but that takes time and you likely won't save much. Time is money you know."
"Yeah that makes sense," the man concedes. "But why does the bar bother to buy the beer from the people? Wouldn't it be much easier to just go out and buy it in bulk?" he asks.
"Well, people's tastes change quickly around here." she answers, adding, "And once you buy it, its yours."
"A bar stocked with beer does not sound like a bad thing to me"
"But if you are the bar owner you want nothing to do with cases of beer you paid for but can't sell. Look closely at whats happening when someone buys a beer."
They both swivel back to face the bar. Soon enough someone orders a drink.
"Take a look at the fridge when the barkeep opens it up to give that guy the Stella he ordered," she says
"Oh wow its pretty much empty"
"Yeah but watch"
Just then someone came selling Stella at the price the bar was paying and a few more Stellas went into the fridge.
Why not go to the store... NBBO, payment for order flow. the beer, the bar, the customers, why time matters, ... links