Adding & removing liquidity & fees

Discussion in 'Options' started by Option Trader, Oct 5, 2010.

  1. I've been trading options for a long time, but for whatever reason don't know the answer to the following.

    If I am trying to buy at bid & I have a straight pass through arrangement with my broker, and the one who sells to me does not have an arrangment with his broker, does HIS broker suffer the loss?

    If so, do they have any way how to avoid such situations used in their routing? Or do the exchanges match like-customers to avoid this (which would be shocking to me since it always seems to me there is proper cue)?
  2. Only if his broker is naive and operates his business out of a phone booth
  3. Thank you.

    So what does happen?
  4. oraclewizard77

    oraclewizard77 Moderator

    You have to wonder if its possible to make money off of retail orders. For example, in IB, they list the limit sell for the $ 7.5 Jan call (Its a covered call since I own the stock) for NEP at $ .65. I see on Yahoo, its listing at $ .85 for the ask, and the bid is indeed $ .65. So I set limit for $ .75 and get an instant fill.

    However, my question being, you would assume some retail traders are accepting the low listed price of $ .65, so I would assume market makers could make at least $ .10/option by just flipping it. I was wondering if normal traders are able to do the same thing since I could see how you could make money almost every day if this works?
  5. donnap


  6. donnap


    The cost is ultimately passed on to the other customer in the form of higher comms and fees.
  7. Perhaps here is a partial answer:

    It would seem quite obvious brokers will prioritize exchanges like CBOE over NASDQ etc when it comes to removing liquidity.

    But when it comes to adding liquidity, it would seem your broker will priioritize NASDQ etc. over CBOE if there is no pass through to the client (to make them money)---albeit it is a less likely fill, in part for the reason we've discussed.

    Everyone agree?
  8. donnap


    I don't pay as much attention to routing issues as I used to because I mainly trade very liquid options.

    IB has the discretion to route orders to the exchanges that give them the lowest cost of execution in the event of NBBO "tie." They take in to consideration order flow pmts and liquidity charges and rebates.

    In the past, this caused problems as some of the slower exchanges held orders and SMART couldn't do its thing. So slow that matching orders were missed. At times it seemed that it was SMART that was slow in rerouting. I haven't had any routing trouble in quite a while.

    I haven't looked into how other brokers handle it.
  9. ok, but it's a little different focus than mine.

    Alternative possibility:

    Maybe payment occurs only when the traders on both sides have pass through relationships with their brokers?

    I have noted that IB doesn't always pay when you bought on the bid or sold at the ask. That could be because of what I said?? (unless you say that's only because of situations where you and your counterparty are routed to different exchanges, and the exchanges work it out with themselves to fill the order?).
  10. donnap


    Yes, comms are all over the place. It's funny, I don't like the higher ones, but I don't question the low ones:p Gotta like the low overall ave. comms. these days.

    Perhaps part of the answer lies in the exchange that the order is executed on. They don't all participate in liquidity programs the same way.

    For me, another reason is that since I trade liquids with tight B/As, sometimes the B/As chamge faster than my order tramsmits.

    Comms are an important part of this game and not to be taken lightly. However, I don't question it much because for me, they are lower than ever. If that changes, I will undoubtedly examine it more closely.
    #10     Oct 7, 2010