How theoretical is the Midpoint?

Discussion in 'Options' started by lightfightercap, Jan 5, 2020.

  1. Hi ET!

    I am doing a little optimization surrounding slippage and avoiding it on 4 legged orders, and I realized that I don't exactly understand how my orders get filled in between bid and ask.

    I realize now that really the best way to avoid this slippage is allow my trades slightly more time in the ether, which means calculating expected move a little earlier, incurring more risk of the underlying moving towards my strikes before close, but probably worth more favorable fills since slippage affects negatively affects positive and negative trades, really jacking up expectancies/averages.

    Anyway, I am salivating over the beautiful TOS UI, the trade grid in particular, and I see 6 exchanges and the quantity/price they are willing to buy or sell these contracts at:

    Screen Shot 2020-01-04 at 10.41.07 PM.png

    Lets say bid is .10 and ask is .16

    I am selling, so the relevant price is the asking price, and the ask price is the lowest price any of these exchanges are willing to sell to me at a moment in time, so how can any seller expect to get filled at anything above .10 without the market moving and the price of the option changing? Where are these orders/fills coming from? Retail Investors? Some dark pool somewhere? Market makers post their best orders on these 6 exchanges, so where do midpoint fills come from?
     
    Last edited: Jan 5, 2020
  2. ajacobson

    ajacobson

    Not really enough info, but a couple of thoughts. 16 options exchange - why are you seeing only 6? No dark pools in option, but there is dark liquidity - sometimes referred to as preferenced liquidity, that is generally deeper markets. The six markets you show change in the chain sometimes from the bid to offer side so I suspect you are seeing some top of market, but I don't really know. Troublesome that your broker would not represent the full quote montage other than to save money. The answer could lie in a COB book if they are routing to one or post-execution looking to see how they filled your order.
     
  3. Robert Morse

    Robert Morse Sponsor

    Good morning lightfightercap, There are few exchanges that have a COB, not all 16. Assuming your order is sent to one of those and not held internally, there are a small number of Option Market Makers (OMM) that scan the COB looking for an edge to "their" values. The National Best Bid Offer (NBBO) midpoint might be relevant and might be skewed from small customer orders on different exchanges, as a way to find"fair value." They will want to do better than their fair value. In your example, there is a small chance that a customer will on their own send an order to offset your offer at any price from $0.16 and lower. This is more likely in active weeks and months with an open interest in symbols with heavy interest like SPY, QQQ and AAPL. For the most part, on most spreads, I expect one of these OMMs automated systems will find value in trading with you when they can make money. Having a limit you will not drop past and slowing walking your order down to that limit, is often the best way to find a buyer. It is also possible that as the stock moves, and other options trade, that "fair value" to the MM can change over time. I hope this helps.

    Bob
     
  4. Thanks for your responses!

    It still seems strange to me that people would expect to get filled at anything better than NBBO, given that it is the "best offer". Of course, it is the best offer for the individual options, not the spreads as a whole.

    In other words, the midpoint is entirely theoretical, it shows a single price that absolutely nobody is really offering

    Is there a way to view the COBs of these exchanges? What would that look like? A bunch of spreads for various equities at various sizes?

    I am trying to determine how realistic it is for me to fill 150 contracts times 4 legs in 15 minutes on several optionable equities with moderate options volume, if it could even be filled at all, and what the slippage might be...
     
    Last edited: Jan 5, 2020
  5. ironchef

    ironchef

    If you are a retail using the usual retail brokerages, mid point is a little misleading. If the underlying is moving around, the mid point displays in your trade box is not the instantaneous mid when you click to buy/sell.

    When I bought, I often asked a little lower than mid and when I sold, a little higher. Often, because of the underlying movement, I got my fill. If I did, I knew I did not get a good deal. It is counter intuitive, a good fill is an ask slightly below and a bid slightly above. Such is the life of an amateur retail options trader. :(
     
  6. comagnum

    comagnum

    Last edited: Jan 6, 2020
  7. Interesting... Bummer these are for buy orders only
     
  8. comagnum

    comagnum

    I would not worry about it. We used to pay $29.95 1-way commissions back in the day. Inflation adjusted its more like $51.
     
    zghorner likes this.
  9. ironchef

    ironchef

    In the good old days I used to pay several hundred dollars commission to the broker to trade 100 shares of a stock, now I pay zero for stocks/ETF and $0.25 for options. Some are still complaining $0.25 is too high.
     
    zghorner and comagnum like this.
  10. Where are you paying $.25 for options?
    I currently use tastyworks as they cap commissions at $10 a leg and don't charge to close, which I think is pretty amazing
     
    #10     Jan 11, 2020