Short Gamma: The Market-Maker Spiral
In my last article I described the margin spiral — leverage feeding on itself until a correction becomes a crash. This one is the same loop, one level down, in the plumbing of the market. The actors aren't leveraged funds this time. They're the market makers who are supposed to keep prices smooth. And their mechanical hedging, in a selloff, does exactly the opposite: it manufactures the crash…
The market-maker spiral is a market phenomenon where market makers, who are supposed to stabilize prices, inadvertently contribute to market crashes through their hedging mechanisms. In the 2026 market state, the VIX was at 15.3, and the SKEW was at 151.58, indicating expensive tail protection. Market makers often hold gamma positions, which means they are exposed to price changes in the underlying assets.
Long gamma positions benefit from falling prices as they buy to stay delta-neutral, acting as stabilizers. Conversely, short gamma positions, resulting from selling options, worsen falling markets as they sell to maintain neutrality, amplifying the decline. The SKEW metric reflects market makers' short gamma positions, and high SKEW levels indicate more dealers are short gamma, potentially leading to a more severe market crash when volatility spikes.
The model estimates that dealers are short gamma with a net gamma of -0.67, amplifying a 5% market shock by up to 15%. Interventions that provide liquidity once prices reach -6% can reduce this amplification, acting as a brake on market crashes. Classical risk models often overlook this feedback loop, which is crucial for understanding and mitigating market risks.
Written by urgent.news from Dev.to's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
