The Hidden Controllers
- Dealers (market makers) don't bet on direction — they hedge everything
- Their hedging activity moves the underlying market
- Gamma exposure determines whether they buy dips or sell rallies
- When dealers are short gamma, markets become unstable
- Understanding dealer positioning = understanding market regime
The Puppeteers You Never See
You think you're trading against other traders. Retail vs. retail. Bulls vs. bears. The eternal battle.
Wrong.
You're trading against a machine. A hedging machine run by dealers — the market makers who take the other side of almost every options trade. They don't care if the market goes up or down. They care about one thing: staying neutral.
And in their pursuit of neutrality, they move mountains.
The Market's Hidden Hand
Dealers don't predict markets. They move them by accident — while trying to stay flat.
"The market doesn't care about your analysis. It cares about the 50 million delta that needs to be hedged in the next 15 minutes. That's what moves price."
— Former Citadel options market maker
Who Are "Dealers" and What Do They Do?
When you buy an option, someone has to sell it to you. That someone is usually a dealer — a market maker whose job is to provide liquidity.
Major dealers include Citadel Securities, Susquehanna, Wolverine, and the options desks of big banks. They collectively handle 80-90% of all options volume.
The Dealer Ecosystem
Retail Trader
Buys calls
Dealer
Sells calls, hedges with stock
Stock Market
Absorbs dealer hedging
Dealers don't speculate. They warehouse risk temporarily and hedge it away as quickly as possible. Their profit comes from the bid-ask spread, not from getting direction right.
But here's the thing: their hedging activity impacts the underlying market. Massively.
The Gamma Equation: Control Without Intent
To understand how dealers move markets, you need to understand gamma — the Greek that rules everything.
Gamma measures how much an option's delta changes as the underlying moves. When you own options (long gamma), your position naturally "follows" the market. When you're short options (short gamma), your position fights the market.
Dealers Long Gamma
When dealers are net long options, they sell into rallies and buy into dips. This dampens volatility and creates stability.
Dealers Neutral
Minimal market impact. Price discovery is "pure" — driven by actual buy/sell orders rather than hedging flows.
Dealers Short Gamma
When dealers are net short options, they buy into rallies and sell into dips. This amplifies moves and creates volatility.
Here's a concrete example of how this works:
Short Gamma Hedging: Why Moves Accelerate
The dealer isn't bearish. They're just hedging. But their hedging pushes price further down, requiring more hedging...
"Short gamma is like trying to balance on a ball while someone keeps pushing you. Every move in either direction forces you to move more. It's inherently unstable."
— Options market structure researcher
The Dominance Numbers
Just how much do dealers dominate? The numbers are staggering:
85-90%
Of all options trades
go through dealers
Every contract, hedged
$300B+
Daily delta hedging
in S&P 500 alone
Dwarfs ETF flows
Milliseconds
Hedge adjustment speed
Continuous, algorithmic
Faster than you can blink
Every Strike
Dealers warehouse inventory
across entire chain
Total market view
When this much hedging activity happens every day, the tail wags the dog. The options market doesn't just reflect the stock market — it moves it.
The Two Regimes: Stability vs. Chaos
The market operates in fundamentally different ways depending on dealer gamma positioning:
Long Gamma Regime
- Low intraday volatility
- Mean-reversion trades work
- Breakouts frequently fail
- VIX stays compressed
- "Buy the dip" is profitable
- Moves get faded automatically
Dealers are your friend. They absorb shocks.
Short Gamma Regime
- High intraday volatility
- Momentum trades work
- Breakouts run and run
- VIX explodes higher
- "Buy the dip" gets crushed
- Moves accelerate viciously
Dealers amplify chaos. Every move breeds more moves.
The same technical setup can work or fail depending purely on the gamma regime. A support level that bounces in long gamma might slice through like butter in short gamma.
The Anatomy of a Dealer-Driven Crash
Let's walk through how dealers can accidentally cause a market crash:
Retail Buys Puts for Protection
Market has been rallying. Smart investors buy puts as hedges. Dealers absorb these puts — they're now short puts (short gamma on the downside).
Bad News Hits
Doesn't matter what. Fed surprise, geopolitical event, earnings miss. Market drops 1.5%. Normal day... except for what's about to happen.
Put Deltas Explode
Those 20-delta puts that dealers sold? They're now 40-delta. Dealers need to sell $2 billion in stock to stay hedged. Immediately.
Selling Creates More Selling
Dealer selling pushes market down another 1%. Now those 40-delta puts are 55-delta. More selling needed. Feedback loop activates.
Stops and Margin Calls Join
Technical stops trigger. Levered positions get liquidated. Dealers still selling. The 1.5% dip becomes a 4% crash — driven largely by hedging mechanics, not fundamentals.
"The dealers aren't trying to crash the market. But their hedging is mechanical. They have no choice. When gamma gets extreme, they become the market — and the market becomes them."
— SpotGamma, options analytics firm
Reading Dealer Positioning
How can you know what regime you're in? Some signals:
Several firms now publish estimates of dealer gamma positioning. SpotGamma and Squeezemetrics are popular sources. They calculate aggregate gamma exposure (GEX) and identify key levels.
When GEX is highly positive, expect stability. When GEX is negative, expect volatility. Simple as that.
Trading With the Dealers (Not Against)
You can't beat dealers. But you can align with their likely hedging activity:
Long Gamma Days
Fade extremes
Sell rips, buy dips
Mean reversion works
Short Gamma Days
Follow momentum
Buy breakouts, sell breakdowns
Trend following works
Strike Pinning
Near expiry, price pins
Largest OI strikes act as magnets
Expiration day phenomenon
Gamma Flip Levels
Know where gamma changes sign
These are key support/resistance
Breaking them = regime change
The Bottom Line
Dealers don't conspire to move markets. They don't have secret knowledge. They don't bet against retail.
But through the mechanical necessity of hedging, they have become the single largest force in daily price action. Their gamma exposure determines whether markets are calm or chaotic.
Understanding this isn't optional anymore. It's the difference between trading in harmony with the market's true structure — and being constantly confused by price action that seems to make no sense.
The Dealer Truth
The market is not a battlefield of bulls vs. bears.
It's a machine driven by hedging flows.
Know the machine. Or be processed by it.
When you understand dealer mechanics, you stop fighting the market — and start flowing with it.