CBOE entry/exit price shell game

Discussion in 'Options' started by circadian, Jul 24, 2008.

  1. Okay, I'll start by posting a very common scenario when I get into or out of a trade.

    I enter a limit buy order of a call option who's CBOE bid/ask is 5.50 and 5.70. I split the bid/ask, and enter the buy order at 5.60, and send it, and with no price movement in the underlying stock, the CBOE qoute will move against me, to say, 5.55-5.70 bid/ask. My spilt order does not get filled, because the current split price is now 5.625. Then, like clockwork, the underlying will begin to move against me, and i am forced to cancel/adjust the order, and "chase" the price a little. I don't have the option of choosing the option exchange to route my order, and notice that the BSE, PSE, ASE exchanges do not seem to be as bad about the frontrunning as CBOE, but I am automatically routed through CBOE everytime.

    What gives? What is the process that is causing this? Is it a frontrunning algo that marketmakers use to con, or what?

  2. You get the NBBO so it does not matter what exchange you send the order to. The prices you see on the screen from the CBOE are generated by a computer, no one is manually changing the price just because you entered an order. The mid point is not relevant since there is no rule saying you should get a mid point fill, that’s a function of order flow and other pricing variables.

    All parties on all exchanges and in front of any screen can see any order you post and hit your bid no matter where they are, its irrelevant that your retail order goes to the CBOE for you. You’re getting the NBBO either way.
  3. One similar thing, which I don't understand:

    Sometimes when I change my sell order, typically for 5 contracts, to be below the best ask, it becomes the new best ask (which I am not surprised by), but also the exchange the order was sitting at increases the number of contracts at that new price to 10 (which I'm also not surprised by)...

    But then, suddenly 2 or 3 other exchanges change their best ask to be the same. So now there are 25 or 30 or 40 more contracts available for 10 cents less than a few seconds ago just because of little ole me and my 5 contract order.

    And if I cancel my order, all the exchanges' asks go up 10 cents, back to where they were, within a few seconds. This is all without any movement in the underlying, on a stock where the spread is typically 20 cents for < $3 options and 30 cents for > $3.
  4. dmo


    You probably know this, but it's not the exchange that changes its order to match yours. Exchanges don't put in bids or offers - market makers and customers do. They're just bidding and offering through the different exchanges.

    What you're seeing is clever robots programmed to change their bid and offer with the best bid and offer. If there's little interest in a back month option for example, the bot will make a market of, say 1.50 bid at 3.50. The bot is really willing to pay, say, 2.00 and to sell at 3.00. So if you bid 1.60, the bot will match you. If you bid 1.70, the bot will match you there too.

    You can tell what that real market is by raising your bid and lowering your offer until the bot won't follow you any more.
  5. It does not matter what the auto quote does to match you. Your order will still be filled first.
  6. There is a difference between what happens and what SHOULD happen. I have proof of the following happening to a number of my orders (I am keeping the proof just in case):

    Suppose the market on a contract is say 0.31 by 0.33.
    I offer a contract to sell at 0.32 via my broker.

    My broker tells me that the order went to exchange X. I check the NBBO. My order price is NOT reflected at all in the NBBO. It happened a susbtantial number of time where I gave it 5 minutes or even more, and it does not appear at all. Usually they will put it (it=my price) only when the market moves up, and I immediately get filled or worse, the market reflect my offer price, but a fill is made to someone else and I do not get a fill at all (this usually happens when price goes down).

    And it is always at the same GIVEN exchange X where this happens to me (with the same broker). Of course the exchange goes not do it, but the peoples/firms at the exchange have the same habit, and/or my broker is not telling me the truth.

    Anyway, at least my broker or those receiving my order from my broker, is/are playing games.

    Do not believe a thing about what they tell you should happen. There is also of course the possibility that my NBBO data may not be correct, but I doubt that. Because I tested that as well---The problem arises only where the order is routed to that particular exchange X and never arose when routed to other exchanges.

    I am sure that experienced people know what I mean by exchange X.
  7. X is the symbol associated with the Philly exchange. Just so happens their systems are second only to the ISE. If you had actual proof its then your fault for not bringing that proof to the proper people at your brokerage. Since you're a retail trader you always get the NBBO, if your bid or offer did in fact improve the NBBO it would be posted electronically without the specialist in that book having to do a thing. Since Philly is obviously part of the linkage and NBBO there is no way or reason an order would not post electronically.

    Again, if you had real proof then it’s your responsibility to bring it to your brokers attention.
  8. That hasn't been my experience, but I guess it's worth a call to my broker next time.

    Just to be clear, you're saying that if I place a sell order at a price below the best ask and my broker routes it to PHLX, whose MM doesn't fill it but posts it, and if all the other exchanges shortly thereafter show the same ask, and if someone else then places a buy order that matches my order in price and quantity but their broker routes it to CBOE, that I will get filled?
  9. Market makers are an oxymoron. Let the market make the market itself. I'm sure any offer will be bid if the price is right. I'm willing to buy WM at $0.10

    Tell me what other free market allows market makers aka front runners?

    Damn maybe they need market makers in the real estate sector to make the markets for the subprime houses. I forgot that's what Fannie and Freddie are doing :)
  10. OP, what do you mean your split order didnt get filled because the split moved to 5.625?

    If you put in a bid for 5.60, the NBBO would be 5.60 / 5.70

    No idea what the hell you're talking about.
    #10     Aug 4, 2008