How do firms like Optiver make money?

Discussion in 'Trading' started by bidask, Feb 27, 2009.

  1. bidask

    bidask

    My understanding is that there is no edge in options market making unless you have order flow.

    In this case, how do firms like Optiver (that doesn't have a brokerage arm) make money? Do they pay for order flow?
     
  2. slippage?
     
  3. tradersboredom

    tradersboredom Guest

    all these broker/dealer trade their own account like traders do but have an edge in commissions and leverage that retail traders don't.

    most of their profit is probably from trading their own account and not on brokerage business.

     
  4. I think they are market market on options and are therefore making the spreads.
     
  5. exactly, and they keep any slippage costs from the trade
     
  6. bidask

    bidask

    okay someone pmed me saying that the exchange guarantees a certain percentage of order flow to market makers.

    if i understand how it all works, then this is their edge.

    however, i don't understand something about guaranteed volume.

    say a non market maker submits a limit order to buy 5 contracts at $10.00. he is the first order in line. a market maker then submits an order to buy 2 contract at $10.00. say this market maker is guaranteed 50% volume. there is a total of 7 contracts at $10.00 and that's it.

    now a the exchange gets a market order from someone to sell 4 contracts. how does the fill work? if the market maker is guaranteed 50% volume, then he should get allocated 2 contracts and the other 2 contracts go to the non market maker. but didn't this allocation just violate the price-time priority? under the price-time priority, the non market maker should have been allocated all 4 contracts.
     
  7. cvds16

    cvds16

    not all exchanges have price-time priority
     
  8. exactly. look up prorata matching