a potential blow to options trading

Discussion in 'Options' started by def, Mar 29, 2001.

  1. def

    def Sponsor

    The Amex and Phlx have proposed new rules which will severely hinder trading by off-floor traders by restricting limit orders and other types of activity that they broadly define as market making (ie. buying and selling the same option in the same day). The head legal council of IB wrote a comment letter explaining the rules in detail. If interested, please take a look at it. I urge you to write your own comments directly to the SEC and/or Congressman.

    The letter is under IB COMMENT LETTERS and is called: Off-Floor Member Functioning as Market Makers

  2. OK, this is starting to tick me off. Kudos to IB for standing up for the individual traders' rights. I will myself be writing a letter to the SEC. But this is getting ridiculous with these regulations and restrictions.
  3. mjt


    I clicked on the link, and it came up in Chinese or something. Can someone give me the gist?
  4. WarEagle

    WarEagle Moderator

    Basically, the new rule proposals claim to seek to limit off floor market making (as def mentioned), but in reality do much more. The criteria they propose to qualify a trader as a "market maker" are:

    1) simultaneous or near simultaneous entry of limit orders to buy and sell securities

    2) multiple acquisition and liquidation of positions in the security in the same day

    3) entry of multiple limit orders at different prices in the same security

    If the rules were adopted, they could penalize brokers, like IB, who allow traders to trade as a market maker according to their definition. The rules are very vague as to how to quantify terms such as "near simultaneous" and "multiple acquisition" which would make for an oversight nightmare for brokers like IB who have to monitor activity electronically.

    So basically, we would all qualify under this criteria if we are making money at the expense of the exchange members. Every day trader, by definition, will violate the second criteria. This is essentially an attempt by the specialists and market makers of these exchanges to get their turf back from traders who have eroded their profits and created a more efficient market.

    In a nutshell, they aren't being as successful at stealing anymore and they want the exchange to protect (or recreate) their monopoly. I just can't believe that the SEC, in all their talk about a fair marketplace, are even considering approving the rules, but according to the IB letter they have already approved similar rules for other exchanges.

    The letter is very well written and exposes the fallacy of the rules and their clear intent to defraud the public in the name of protecting the market making business of the exchange members.

    I'm just glad that I'm not an options trader...but if it can be done there, it could be done elsewhere. With all of the new proposed rule changes, there should be no doubt that day traders are making a more efficient and orderly market. Otherwise, the good 'ol boys wouldn't be so worried about us.

  5. mindgame


  6. mjt


    How do individual traders act as market makers? I thought that we always had to pay the spread when trading options.
  7. def

    def Sponsor

    mjt, you do not have to pay the spread if you place a limit order. And that's the point - it seems they don't want limit orders. BTW, I can't say this is the viewpoint of all market makers. (IB sister company Timber Hill is one of the biggest market makers around and has seats on the AMEX and PHLX and is obviously against this proposed rule).
  8. I am a very active options trader and rely daily on available order routing systems. Over the last two years, I have seen the quality of public access to the options markets intentionally and systematically eroded by a barrage of new regulations.

    The exchanges are building a regulatory wall around their members to counter the evolution of new technologies available to the public. The result has been wider spreads and useless auto-ex systems. The exchanges routinely fade from limit orders at market while the SEC gives them extensions to the firm quote rules. I often wonder to what extent the exchanges have colluded against the public in the development of current floor practices?

    I would like to complement IB on their letter to the SEC; however, I believe the SEC has spent little time considering the needs of the public they serve. Unless active public traders create a lobby for their interests this trend will accelerate.
  9. tradewiz


    This is stealing from public under the legal protection from SEC. If they can make stealing a legal thing on option exchanges why can't they make it on the NASDAQ.
  10. liltrdr


    Any idea of the SEC's response? I understand how market makers would want to protect their turf. It's easy money in a lot of cases. This is almost exactly like the Microsoft case except for some reason, individual traders (who are basically just retail consumers) are being treated like scum. I remember my economics professor taught us that daytraders add "volatility" to the stock market and are thus bad. I think until the public are made aware of what the direct access industry offers, they will continue to be screwed without even knowing it. It's such a shame that theyw ere taught this buy and hold till death strategy and now it's biting them on the ass. I know people who cannot retire because some jackass on wall street told them that as long as they put money in a mutual fund, everything would be ok. Most mutual fund managers can't even beat the S&P. It's just sick. The only thing the mass media shows about daytraders is some psychopath in atlanta going crazy. Analysts like Mary Meeker (I forget which bank she's with) have ruined the portfolios of millions of people. Just my .02
    #10     Oct 1, 2001