Who is actually on the other side of your trade is not a curiosity — it influences spreads, liquidity and the probability that your order is filled at a fair price. An overview of the most important players.
👤
Retail
~20-25 % US volume
Private investors via Trade Republic, Scalable, Comdirect, IBKR, Robinhood. Small orders, news-driven. Concentrated in a few popular securities.
⚖️
Market Makers
Citadel Securities • Virtu • Jane Street
Quote bid and ask simultaneously, earning the spread. Citadel Securities alone handles around 25 % of US retail volume.
⚡
HFT
~50 % US equity volume
Algorithms with latencies in the micro-/nanosecond range. Co-location in exchange data centres, microwave networks between Chicago and New Jersey.
🏦
Institutional
BlackRock • Vanguard • State Street
The "Big Three" together hold ~20 % of the S&P 500. Pension funds, sovereign wealth funds. Large block trades often run off-exchange.
🎯
Hedge Funds
Bridgewater • Renaissance • Citadel
May leverage, short, use derivatives. Strategies: Long/Short Equity, Global Macro, Quant. Fees: "2 and 20". Renaissance Medallion: ~66 % gross return over 30 years.
📉
Short Sellers
Chanos • Muddy Waters • Hindenburg
Borrow shares, sell immediately, buy back cheaper. Function: price discovery & fraud detection. Enron, Wirecard and Nikola were exposed by short sellers.
🌑
Dark Pools
~15 % US equity volume
Private trading venues (ATS), anonymous block trades without order book visibility. Goldman Sigma X, UBS ATS, Credit Suisse Crossfinder.
🇪🇺
MTFs & OTC
Cboe Europe • Turquoise • Aquis
MiFID-II-regulated exchange alternatives in Europe. OTC is directly between two parties — typical for bonds, forex spots and many derivatives.
Retail Traders
Private investors trading via apps such as Trade Republic, Scalable Capital, Robinhood or IBKR. Small individually — but collectively a mass that can move markets when acting in a coordinated way. A few hundred thousand Reddit users proved that in 2021.
20–25%
US equity volume (post-2020)
10–15%
DACH equity volume
Top 5
Securities account for ~60% of retail volume
📦Small Order Sizes
Typically 10–500 shares or 1–5 option contracts — too small for market impact individually, but significant in aggregate.
📰News-Driven
Retail reacts to headlines, tweets, Reddit posts — often with a delay. Institutional players are hours ahead on breaking news.
🧠Psychology-Prone
FOMO, confirmation bias, overtrading. Terrance Odean's study (1998): retail underperforms the market by ~1.5% p.a. — primarily through poor execution and over-trading.
🔥Concentration in Hype Stocks
Tesla, Nvidia, Apple, AMD — retail provides the main liquidity there during certain time windows (pre-market, post-earnings).
🗓 January 2021
Melvin Capital: −53% in January
u/DeepFuckingValue: $53k → $48 million
🎮 GameStop · r/WallStreetBets
"They can't stop us all — we like the stock."
How 3 million Reddit users brought a billion-dollar hedge fund to its knees — and tested the financial system to its limits.
GameStop was the Blockbuster of the video game industry. Physical games, dying shopping malls, Amazon and Steam as grave-diggers. Melvin Capital — a billion-dollar hedge fund — aggressively bet on its decline: short interest in GameStop at times exceeded 140% of the float (possible because shares can be re-lent multiple times).
Then Keith Gill appeared. Under the Reddit name u/DeepFuckingValue and on YouTube as "Roaring Kitty", he had been posting an unusual thesis since 2019: GME was fundamentally undervalued — Ryan Cohen could transform the company like Chewy. Nobody listened. Until January 2021.
11 Jan 2021
Ryan Cohen joins the GME board. Price: ~$20. Reddit community begins to coordinate.
25 Jan 2021
Elon Musk tweets "Gamestonk!!" — 50 million followers, pre-market +70%. WallStreetBets collapses under the load of 8 million simultaneous users.
27 Jan 2021
GME reaches $347. Melvin Capital is bleeding. Citadel and Point72 pump $2.75 billion as emergency aid into the fund.
28 Jan 2021 — 09:30
Intraday peak: $483. Then Robinhood halts buying of GME, AMC and 13 other meme stocks — citing capital deposit obligations at the clearinghouse (DTCC demanded $3 billion deposit, negotiated down to $1.4 billion). Price collapses to $112.
Feb – Mar 2021
Congressional hearings. Robinhood CEO Vlad Tenev, Citadel CEO Ken Griffin and Keith Gill himself — in a bandana headband — testify before the US Congress.
2022
Melvin Capital finally liquidates. Keith Gill disappears from social media. GME trades back at $25.
The irony: Robinhood, which had launched with the slogan "Democratize Finance", raised the drawbridge at the decisive moment. The platform that embodied retail power ultimately protected the clearing system — and thereby indirectly the institutional players that Citadel Securities paid via PFOF. Whether intentional or structural constraint: the moment became a symbol for the structural imbalances between retail and Wall Street.
🗓 May – June 2020
Hertz: Bankruptcy
HTZ price: +1,300% during bankruptcy
🚗 Hertz · Reddit
"Buy the bankrupt stock." — And it worked. Briefly.
How retail traders drove a price up during bankruptcy — and Hertz tried to pocket $1 billion in the process.
On 22 May 2020 Hertz filed for Chapter 11 bankruptcy. Normally shareholders would be completely wiped out — creditors come first. The stock fell to $0.40.
Then Reddit users discovered that HTZ was still tradeable. The logic was simple yet absurd: "It's nearly worthless — if it rises even a little, that's enormous." Retail bought massively. The stock climbed from $0.40 to $5.53 — a gain of over 1,300% while the company was officially bankrupt.
What followed was even more absurd: Hertz's bankruptcy lawyers petitioned the court for permission to issue $1 billion in new shares — to monetise the retail hype. The court initially approved it. The SEC intervened before the shares were sold, pointing to the fair disclosure obligation: a company in bankruptcy proceedings may not issue new shares without explicitly disclosing the risks.
In the end the old shares became worthless as expected. Hertz emerged from bankruptcy as a new company with a new ticker — those holding the old shares lost everything. Those who had sold in time had made 13× on a bankruptcy.
💡 GME and Hertz show: retail mass can overwhelm any short seller or fundamental valuation in the short term. But: in 90% of cases fundamental valuation wins in the long run. Most retail traders of the meme era lost money — only a few perfectly timed participants won. FOMO is the most expensive emotion in financial markets.
Market Makers (MM)
Imagine you want to buy 500 Apple shares immediately — without having to wait for a seller to appear. That is not a given. Someone must stand on the other side. That someone is the market maker. At every point in time they quote both a buy price (bid) and a sell price (ask) — not because they have an opinion on the stock, but because they are paid to do so: through the spread.
This sounds simpler than it is. After every trade an MM sits with an inventory risk: they have bought shares they don't want, or sold shares they don't own. Their core task is therefore not earning the spread — it is permanent risk neutrality. The spread income is the compensation for this service. And at millions of transactions per day, even a cent adds up.
MM buys from you
$182.50
at the bid price
when you sell
→
MM earns
$0.05
per share
spread
→
MM sells to you
$182.55
at the ask price
when you buy
Scaled up: $0.05 spread × 100 million shares/day (Citadel Securities alone) = $5 million gross revenue daily — from which hedging costs, technology and capital costs are subtracted. What remains is still one of the most profitable business models in finance.
NYSE vs. Nasdaq — two MM models
One MM per symbol — with an official obligation to continuously quote.
Obligations: Must intervene to stabilise in volatile phases — even at a cost.
Advantage: More stable price discovery, fewer flash crashes. Disadvantage: Less competition → tends towards slightly wider spreads.
Multiple MMs per symbol competing against each other — whoever quotes the tightest spread gets the order.
No stabilisation obligation — in panic phases all MMs can simultaneously withdraw their quotes.
Advantage: Tighter spreads under normal conditions. Disadvantage: Higher crash vulnerability (Flash Crash 2010).
Example flow 1 — Large short position is unwound
Setup: A hedge fund holds 5 million shares short in a stock at $30. A fundamental shift (e.g. surprisingly strong earnings) forces it to cover — it wants out, immediately.
1
Fund places large buy order
5 million shares at market price (market order) — MM must provide liquidity on the ask side and sells shares it does not own.
MM builds short inventory
2
MM immediately hedges its inventory
To neutralise the short position, MM itself buys back aggressively — at other venues, dark pools, or immediately raises its ask. The additional buy volume drives the price even higher.
Ask price rises: $30 → $31.50
3
Other shorts see growing losses
Stop-losses on other short positions are triggered. Margin calls force further funds to cover. Each new buyer increases the pressure on remaining shorts.
Cascade: stop-loss → buy → price rise → next stop-loss
4
MM widens spreads dramatically
Inventory risk rises, uncertainty about fair price grows. MM protects itself with wider spreads — $0.05 becomes $0.50 or more. Every trade now costs the buyer dramatically more.
Spread: $0.05 → $0.40+
5
Exhaustion: new sellers emerge
Long investors see the stretched valuation and take profits. Buying pressure is exhausted. MM normalises its quotes once inventory is neutral again.
Stabilisation — new price equilibrium forms
The MM is not the driver of the short squeeze — it is the shock absorber. But its hedging behaviour (buying to cover short inventory) amplifies the upward pull. Anyone placing market orders in such phases pays 10–20× the normal spread.
Example flow 2 — Massive put buying and delta hedging
Setup: AAPL is trading at $185. A large player buys 50,000 put contracts (strike $180, 30 days to expiry) on AAPL. Each contract = 100 shares → 5 million share equivalent. Delta of the put: approx. −0.30 (price rises $0.30 for each $1 decline).
1
MM sells the puts — and is now long delta
MM is now short 50,000 puts. Short put = positive delta exposure: MM profits if AAPL rises. But it holds no opinion — it wants to be delta-neutral.
MM delta: +0.30 × 5,000,000 = +1,500,000 share eq.
2
MM sells ~1.5 million AAPL shares to hedge
By selling shares MM brings its net delta to zero. This short-selling volume goes immediately into the market — as real supply on the bid side.
Selling pressure: −1.5 million shares → AAPL falls to $183
3
Price falls → delta rises → MM must re-hedge
At $183 the $180 put now has delta −0.42 (closer to strike, more sensitive). MM now needs +0.42 × 5 million = +2.1 million share eq. to hedge — was only at 1.5 million → must sell another 600,000 shares.
Renewed selling pressure → AAPL falls further
4
"Gravity Well" around the strike price
The closer AAPL gets to strike $180, the more aggressively the MM must hedge (delta approaches −1.0). On expiry Friday a magnetic pull forms: the price is literally drawn towards the nearest large strike.
"Max Pain" — price gravitates to $180
5
After expiry: hedges are unwound
If puts expire worthless (AAPL closes above $180), MM unwinds all short share positions — buys back. This often produces a brief post-expiry price rally (hedge unwind).
Recovery possible after expiry
Key concept — Negative Gamma: The options MM sits in "negative gamma". That means: the more the price moves in any direction, the more it must hedge — in the same direction. This amplifies trends rather than dampening them. The opposite applies when MMs are long gamma (e.g. with straddle buyers on the other side).
The dominant market makers
Citadel Securities
Equities · Options · Bonds
Handles around 25 % of US retail equity volume. Many Robinhood and Schwab orders land here via PFOF — not at the exchange.
~25 % US retail volume
Virtu Financial
Equities · FX · Commodities
One of the largest global MMs, publicly listed (NASDAQ: VIRT). Known for remarkably few loss days — transparency through stock exchange listing.
NASDAQ: VIRT
Flow Traders
ETF · Europe focus
ETF market-making is their core business, Euronext heavyweight. Particularly benefits in volatile phases when ETF spreads explode.
Euronext leader
Susquehanna (SIG)
Options · Quant
Strong in options market-making. Pioneers of the quantitative approach — legendary for their internal trading training and poker mindset.
Options specialist
Jane Street
ETF · Bonds · Quant
Technology-focused, one of the world's largest ETF MMs. Trades hundreds of billions of USD daily. Known for excellent quant culture and extremely selective hiring.
Hundreds of bn USD/day
HFT — High Frequency Trading
Algorithmic trading with execution times in the micro- to nanosecond range. HFT firms operate co-location (servers directly in exchange data centres, minimising fibre-optic distance) and microwave networks between Chicago and New Jersey.
Typical strategies:
- Statistical arbitrage: Exploit price differences between correlated assets (ETF vs. constituents, ADR vs. home exchange) within milliseconds.
- Latency arbitrage: See price changes on one exchange earlier and act ahead of other venues.
- Market making: Many MMs are themselves HFT firms.
Criticism: The Flash Crash on 6 May 2010 (Dow −9% in minutes, then recovery) was partly caused by HFT withdrawal from the market. Today the HFT share of US equity volume stands at around 50%.
Institutional Investors
Large players with billions in AUM (assets under management):
- Hedge funds: Bridgewater (world's largest hedge fund, ~$150 billion AUM), Citadel (Ken Griffin), Renaissance Technologies (Medallion Fund, around 40%/year over 30 years), Millennium, Point72.
- Pension funds: CalPERS (USA, ~$500 billion), Norwegian Government Pension Fund (>$1.5 trillion), German occupational pension schemes.
- Sovereign wealth funds: ADIA (Abu Dhabi), Temasek/GIC (Singapore), PIF (Saudi Arabia).
- Mutual funds / ETF providers: BlackRock (iShares), Vanguard, State Street (SPDR) — the "Big Three" together hold around 20% of the S&P 500.
- Insurance companies: Allianz, Munich Re — classically conservative in bonds.
Large block trades by these players often run off-exchange to avoid market impact.
Hedge Funds
Hedge funds are investment vehicles for institutional investors and high-net-worth individuals that are broadly permitted to do everything barred to regulated funds: short-sell, leverage, use derivatives, invest in illiquid assets. The name derives from the original idea of "hedging" — protecting against risk. Today most hedge funds are anything but defensive.
The decisive difference from public mutual funds: hedge funds have no obligation of daily liquidity, can have lock-up periods of 1–3 years and are only required to be transparent towards accredited investors. That explains why Renaissance Technologies' Medallion Fund achieves the most spectacular returns in financial history — and yet nobody outside knows exactly how.
Fee structure: "2 and 20"
2%
Management Fee
annually on AUM,
regardless of performance
20%
Performance Fee
on gains,
often with high watermark
Today
Market Pressure
often only 1.5% & 15%
or 1% & 10%
The four main strategies
⚖️Long / Short Equity
Simultaneously long in undervalued and short in overvalued stocks. Goal: market direction is irrelevant — only relative performance counts. Largest HF category.
Citadel, Tiger Global
🌍Global Macro
Bets on interest rates, currencies, commodities and entire economies. Top-down approach. George Soros broke the Bank of England in 1992 with a GBP short bet.
Bridgewater, Brevan Howard
📋Event-Driven
M&A arbitrage (buy target, short acquirer), distressed debt, special situations. Profit from pricing anomalies around corporate events.
Elliott Management, Pershing Square
🤖Quantitative / Systematic
Algorithms, no opinions. Trade patterns across thousands of assets simultaneously. Renaissance Technologies is regarded as proof that market inefficiencies can be systematically exploited.
Renaissance, Two Sigma, D.E. Shaw
Notable funds
Bridgewater Associates
Global Macro
World's largest hedge fund. Ray Dalio's "All Weather" portfolio philosophy. Known for radical transparency culture internally.
~$150 billion AUM
Renaissance Technologies
Quant / Systematic
Medallion Fund: ~66% gross return p.a. over 30 years. Only accessible to employees. Founded by mathematician Jim Simons. The world's most secretive fund.
Medallion: ~$10 billion
Citadel
Multi-Strategy
Ken Griffin. Not to be confused with Citadel Securities (MM). Wellington Fund with ~$60 billion. One of the world's largest multi-PM funds.
~$60 billion AUM
Two Sigma
Quant / Data Science
Founded by MIT mathematicians. Regarded as "data science applied to finance" — machine learning in every process. Very selective hiring.
~$60 billion AUM
Millennium Management
Multi-PM Platform
Izzy Englander. Hundreds of independent portfolio managers with their own P&L, strict drawdown limits. A model many modern funds have copied.
~$65 billion AUM
Short Sellers
Short sellers bet on falling prices — by borrowing shares, selling them and hoping to buy them back cheaper. That sounds like pure speculation. In fact professional short sellers are often the only market participants actively looking for overvaluations and accounting fraud. Enron might have gone undetected for years longer had Jim Chanos not researched it intensively. Wirecard would have cost the German taxpayer more money.
How a short works
Step 1
Borrow
Borrow shares from
broker (lending fee: 0.1–50% p.a.)
→
Step 2
Sell
Sell borrowed shares
immediately at market price
→
Step 3
Wait
Price falls
(thesis is confirmed)
→
Step 4
Cover
Buy back cheaper
— difference = profit
Asymmetric risk: Maximum gain = 100% (stock goes to zero). Maximum loss = theoretically unlimited (stock rises indefinitely). That is why professional short sellers manage position sizes very conservatively and often hedge with call options.
Notable short sellers
Jim Chanos
Kynikos Associates
Legendary short seller. Shorted Enron as early as 2000 — a full year before its collapse. Also early short on Wirecard and multiple Chinese companies.
Enron · Wirecard · China frauds
Carson Block
Muddy Waters Research
Specialises in Chinese reverse-merger frauds. Sino-Forest in 2011 lost 70% after his report. Pioneer of the "research short" — publish first, then profit.
Sino-Forest · Luckin Coffee
Hindenburg Research
Activist Short Seller
Nikola (2020): revealed that the supposedly functioning e-truck had merely rolled down a hill. Adani Group (2023): $150 billion in market cap wiped out in India after the report.
Nikola · Adani · Block Inc.
Gotham City Research
Anonymous / Europe focus
Exposed Gowex (Spanish Wi-Fi startup, 2014): CEO admitted to years of balance-sheet fraud. Stock went to zero. Anonymous firm — founders' identities still unknown today.
Gowex · Let's Gowex
🗓 2015–2020
Damage: €1.9 billion "missing money"
Short sellers: +300–700%
🇩🇪 DAX · Wirecard AG
"The €1.9 billion probably don't exist."
How short sellers and an FT journalist swam against the tide for years — while BaFin, auditors and the media helped the fraudsters.
Wirecard was Germany's greatest fintech success story. Payment processing, growth, innovation — in 2018 Wirecard displaced Commerzbank from the DAX. CEO Markus Braun was a billionaire. Jan Marsalek was regarded as one of Europe's most brilliant managers. The company was so successful that any critical voice was considered unpatriotic.
Meanwhile short sellers and investigative journalists had been documenting massive irregularities for years. FT journalist Dan McCrum had been researching since 2015 — and was met with legal threats, surveillance and attempts to discredit him using forged documents. Gotham City Research and others published short reports. BaFin responded in 2019 to the short-selling activity — not with an investigation of Wirecard, but with a ban on short positions in Wirecard shares. The regulator protected the fraudster.
2015–2019
FT and short sellers repeatedly publish investigations into Wirecard's accounts. Wirecard sues, BaFin protects. Short sellers temporarily lose money as the price keeps rising.
Feb 2019
FT publishes internal documents. BaFin files charges — not against Wirecard, but against the FT journalists for alleged market manipulation.
Oct 2019
KPMG is commissioned to conduct a special audit. EY had certified the accounts years earlier.
April 2020
KPMG final report: Cannot confirm the existence of ~€1 billion in escrow accounts. Stock −40%.
18 June 2020
Wirecard admits: €1.9 billion probably don't exist. CEO Braun resigns, is arrested. Stock from €100 to €2.
19 June 2020
COO Jan Marsalek flees — presumably with the help of Austrian intelligence networks to Russia. Not apprehended to this day.
2021–2024
Criminal proceedings against Braun. Wirecard scandal leads to comprehensive BaFin reform. EY loses audit mandates. Short sellers who held on realised +300–700%.
Wirecard is not an isolated case — it is a case study in herd thinking, regulatory failure and the value of short sellers as a corrective force. The greatest irony: BaFin probably protected through the 2019 shorting ban the very people who ultimately stole €1.9 billion from investors.
💡 Short sellers are unpopular with many — they profit from price declines, have incentives to spread bad news and are active in weak markets. Nevertheless: without them Enron, Wirecard and Nikola would likely have gone undetected for much longer. Short selling is not the opposite of market integrity — it is a part of it.
Dark Pools
Private trading venues ("ATS" — Alternative Trading Systems) where large block trades are executed anonymously and without order book visibility. Execution prices are published only after the trade. Share of US equity volume: ~15%.
- Advantage for institutions: No market impact — a 1-million-share order does not move the public price in advance.
- Disadvantage for retail: Price formation becomes less transparent. What is visible at public exchanges is only a fraction of the actual order landscape.
- Operators: Almost all major banks have their own dark pools — Credit Suisse "Crossfinder", UBS "ATS", Goldman "Sigma X", Barclays "LX".
MTFs & OTC Trading
MTFs (Multilateral Trading Facilities) are MiFID-II-regulated exchange alternatives in Europe. Examples: Cboe Europe (formerly BATS), Turquoise (LSE Group), Aquis Exchange. They compete with traditional exchanges for volume and force them towards tighter spreads.
OTC (Over-the-Counter) means directly between two parties without an exchange — typical for bonds, forex spots and many derivatives. Practically the entire forex market is OTC. For derivatives there has been a post-financial-crisis push towards central clearing via CCPs (e.g. Eurex OTC Clear, LCH SwapClear) to reduce counterparty risks.
PFOF — a brief overview
Payment for Order Flow: The retail broker routes client orders not directly to the exchange, but sells them to market makers (e.g. Citadel Securities) in exchange for a rebate. The MM profits from the spread, the broker from the rebate, and the client may receive a marginally worse price.
- USA: Still permitted — main revenue source for Robinhood and some commission-free brokers.
- UK, Belgium: Banned.
- EU (incl. Germany): Banned since 1 January 2024 under the MiFIR II reform.
Conflict of interest: the broker has an incentive to route orders to the highest-paying MM — not necessarily to the one best for the client. Details in Chapter 6.8 Fees & Hidden Costs.
💡 Citadel Securities handles around 25% of all US retail equity volume — many Robinhood and TD Ameritrade orders effectively land there before they ever see a public exchange.