A case for SEC: How criminal Market Makers rob the traders

A case study.

We are always advising novice traders to use limit orders, and then use the MidPrice between Bid and Ask.
But take a look at the criminal energy of how some bad Market Makers still cheat the traders:
they simply enlarge the Bid/Ask spread by setting either the Bid lower or the Ask higher to move the MidPrice to where they want it to be!...
And: only Market Makers can set the Bid and/or Ask to such arbitrary values, but not the traders!
The consequence is that now the Bid/Ask spread is bigger, and the IV rises to very high values, as well the MidPrice becomes the price the Market Maker wanted to be...
Do you now see how criminal these Market Makers are?

Proof: inspect the Bid/Ask prices for example of the following Put options, especially the Ask prices, b/c some of them are clearly illegal prices, meaning fraudulent prices set by the Market Maker, with Puts especially Ask prices that are greater than the strike are illegal prices! :



And

 

High-Frequency Trading (HFT) is a trading strategy that utilizes powerful computers and algorithms to execute a large number of trades in milliseconds. While HFT itself is a legal trading practice, there have been instances where it has been involved in controversial or potentially illegal activities. Some of the concerns or allegations associated with HFT include:

1. Manipulation and Market Abuse: There have been claims that HFT firms engage in manipulative trading practices to exploit market conditions and gain unfair advantages. This includes activities such as spoofing (placing orders to create false market demand or supply) or front-running (trading ahead of known large orders to profit from price movements).
   
   
2. Flash Crashes: HFT has been linked to instances of flash crashes, where the market experiences a sudden and severe drop in prices, followed by a rapid recovery. While not necessarily criminal, these events raise concerns about the stability and resilience of financial markets.
   
   
3. Co-location and Data Advantage: HFT firms often seek to locate their trading servers as close as possible to exchange servers to minimize latency and gain an information advantage. This practice, known as co-location, can raise questions about fairness and equal access to market data for other participants.
   
   
4. Latency Arbitrage: HFT firms may exploit minuscule time lags in the transmission of market data to execute trades and profit from price discrepancies across different trading venues. Critics argue that this practice can lead to distortions in pricing and disadvantage other market participants.
   
   
5. Regulatory Challenges: Regulators face difficulties in effectively monitoring and regulating HFT due to the complex nature of the strategies involved and the speed at which trades are executed. Ensuring fair and orderly markets while balancing innovation and competition remains a challenge.
   

It's important to note that not all HFT activities are illegal or considered crimes. Many HFT firms operate within the bounds of the law and contribute to market liquidity and efficiency. However, concerns and allegations of misconduct associated with HFT have prompted regulatory scrutiny and calls for increased oversight and transparency in the industry. Regulators continue to assess and implement measures to address potential abuses and maintain the integrity of financial markets.

 

You will see that our friend earth will come up with something else more shocking.

Like a huge bid ask spread or some required minimums on shorting ditm puts on penny stocks.

 

I look forward to your post but please differentiate legal activates that you want to avoid or dislike from illegal ones that breach the rules or ethics of regulators.

 

Of course I do not mean all MMs are criminal, only those who really are.

 

Hey @traider, are you a MM?

 

Being an options buyer, I can see the market maker manipulations to make the options buyer pay a higher price when buying and selling at a lower price when selling. That is just the nature of the game. They make their monies on wide bid and ask spreads. That said, understanding what they are doing, you are able to time your entries and exits better. Take note, there will be times when the market maker low balls your selling price. Example, market maker sets the bid at $1.00, your ask is at $2.00. Then, he starts moving the price lower to $0.90, $0.80, $0.70, etc until it reaches $0.50. If the market maker is playing games, do not sell your options that day. Guess what happens the next day? Market maker is now the seller of those options. He sets the prices higher. Of course, he wants prices now, as high as possible. This is where you get out at favorable prices when selling. Now, if you were buying, set your buy price just ahead of the market maker bid price. Your order to buy will get filled ahead of his because he is paying much less and would be lower on the list of buyers. Take note, other market makers are also, on the opposite side of his trade. And if he keeps ratcheting up his price, his cost to buy the options just got higher and more expensive for him. Just cancel your order then. Buy when the market maker is low balling other traders then, set your buy order (bid price) higher than that of the market maker. That is when you buy. If the bid is $1.00 and ask is $1.10 or $1.20, I would get in thru a mid price order or a limit at the ask of $1.10. It is up to the trader to understand what is happening and act accordingly.

 

@smallfil, can you comment on the case of the above VERU 2 Puts?
MidPrice = (0.43 + 5) / 2 = 2.7150
Do you think such a price of say 2.70 is fair?
IMO it's unethical & simply a robbery b/c this option can never ever be priced above the strike, ie. $2

 

I was before 2010 on the AMEX.

 

Life is not fair. There are abuses and injustices happening everyday, everywhere in the US and elsewhere. It is what it is. So, the market maker is trying to low ball the seller which is at 2.45, bid is at 0.91. If you are trying to sell your option, what you should do is wait till the next day. The same market maker will sell the same options he bought at lower prices at the higher price that he can get for it. So now, the asked price could be at 3.50 especially if the stock is dropping in price by a lot. Say, the bid price now is 3.00 and ask is 3.50. You can now try and get out at 3.25. If the stock is dropping like a rock, just wait as the option prices goes even higher, say it goes to bid 4.00 and ask 4.50. If I was trying to get out, I would now hit the bid price of 4.00 and close out my trade. So, you have a problem, I give you the solution. No market maker can force you to sell at a price you do not wish to sell at. It is all under your complete control.