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How does one become a liquidity provider? What does that mean? What sort of volume do they have to do? Why does he pay $0 commission?
Is he based in Australia like you?
I am not sure of how it works with the CME, but I would guess that for the most liquid futures contract in the world, the ES, there are no market makers designated by the CME for this contract (why would there be, since it is liquid enough?). But, maybe they do have designated MMs, I'm just not sure of the CME's structure for this.
A market maker is a trader or a firm who quotes both sides of a market. Their primary purpose is to provide liquidity. This means that there are sufficient firm quotes to fill orders from customers. So, firms can register as market makers for a stock and are designated to provide liquidity, and will sell stock to, and buy stock from, other firms and customers. This allows for a less volatile market, one that will invite customers to participate, knowing that a market actually exists, which might not otherwise without a liquidity provider such as a MM. Imagine a farmer's market where only 2 or 3 farmers brought tomatoes to the market. There would be less inventory, potential supply/demand issues, and much less price competition, than if 20 farmers were buying and selling tomatoes. With 20 farmers selling and buying tomatoes, you don't worry about supply issues if there are a large influx of customers, you don't worry about price collusion, and you get a better idea of what a fair price is for tomatoes, compared to having only 2 farmers there.
On a system like NASDAQ, market makers are used and compete with each other, and this serves to increase liquidity and tighten spreads. In return, a designated MM may pay little or no fees, because they are under obligation to have firm quotes (they cannot back away) and must generally offer a minimum quote during normal trading hours. They benefit by capturing the spread because they are entering a 2-sided quote (as opposed to a trader who is directional and is either bidding a market up or offering it down). Note that the NYSE does not have competing MMs but rather has a single specialist for each stock that fulfills duties similar to a MM.
In this light, I suppose it can be said that anyone can act as a market maker or liquidity provider by doing what a designated market maker does, but without the designation, benefits, or obligations.
I am not a lawyer or a licensed broker, but in simple laymens terms this is my understanding. CME classifies specific 'entities' that qualify for a designation under rule 106. For example a hedge fund that meets the prescribed qualifications has a rule 106 designation which is then used to determine the applicable fee schedule. A qualified seat lessee has a rule 106 designation, and so forth. A subset of the rule 106 designee's may then qualify for the designated liquidity provider fee schedule. For this subset that qualify, CME then uses volume per month to determine a designated liquidity provider's fee for that month, where above 15,000 contracts traded in CME Index Futures Globex products per month the CME Globex Fee is $0.
I don't know about zero commission, but generally, the bigger you trade, the cheaper the commission per unit traded. If you have a seat on the exchange, it lowers your price per unit further. I wouldn't be surprised if the huge HFT's are at zero commish or close. It never made sense to me, seeing as they don't quite fulfill the functions of a traditional market maker, but I'm sure they have special deals cut with the exchange.
As for the original poster's question, I can tell you from personal experience that getting filled live is MUCH more difficult than getting filled on sim in the ES, especially when you are looking to do true scalping, i.e. buying the bid and selling the offer. True scalping in the ES for an individual (not a computer program) is basically impossible.
If by scalping you mean going for 1 - 3 ticks per trade with equally small losses, that can be done by an individual, but remember that at that level, it's like being a professional athlete and you will have to train like one. If you're having an off day, you have a cold, whatever, you can't trade. In other words, you will require discipline on a level you may not understand yet. I say "may" because I don't know you.
When I traded spreads with a prop firm we behaved like Market Makers. We were always bid / ask the spread between two markets, we accumulated positions and wound out of them based on a mean reversion strategy. The commissions were very low, I think we paid .20Eur / side, and that was based on the volume we were doing and the deal we made with the clearing house. I traded thousands of contracts per day. We considered ourselves to be Liquidity Providers but most often I felt like a liquidity taker going home with massive positions every day. I think I was responsible for 1% of the FTSE volume for a period of 6 months or so.... No thanks.
The problem I think with scalping for ticks is the Risk/Reward. Your max profit is clearly capped at 1 tick, but it's very hard to keep your risk at 1 tick. If you're long and the market goes offered below your price, you would have to pay 2 ticks if you wanted to exit the trade immediately. Meaning you need 3 full winners (accounting for retail commission rates) to get back to even.