Non members update with cancel/replaces. Very slow vs what a member can do. You will get picked off all the time.
I am 99percent sure they know the answer to this and didn't want to tell you. There are some very major buyside vol firms who execute through IB.
Sorry, but that is not what I'm saying. If I'm a Pro-customer, and I want to enter a market of 1.00x1.05 10x10, I have to say: Buy to open 10 @ 1.00 Sell to Open 10 @ 1.05 (Ignoring that each order has to be tagged properly as to open and close, which means that if I buy 5, the offer must be canceled and replaced with sell 5 to close and sell 5 to open) Now the stock drops $0.25 and I want to lower my market. To change that market to 0.97x1.02 10x10, I have to send a cancel/replace for the bid and one for the offer. My system waits for confirmation of the cancel then sends the new orders. That has a delay even if you are hosted. With options, if your system reads the stock price change 10 ms or 10 seconds after it occurred, a fast MM can hit your 1.00 bid before you cancel at the orderbook. You will do trades you expected not to. Late is late. I member/Permit holder has a direct connection to the order book with a system that communicates with bulk messages. With one message, I can change hundreds of option 2 sided markets. I also don't have to be concerned with open and close. Market maker orders do not have to be tagged that way and are always tagged to open. BTW, for hard to borrow symbols, you need a locate and they don't. They are exempt in order to allow them to offer depth and liquidity. You just can't build a model that works as non-member to compete in equity options. Bob
Thank you, Bob. Your explanation is very clear and helpful. Normally the equity MMs are disadvantaged, because they have to hold a negative selection portfolio on their books. Hence they need a technical edge to offset that. But since large funds use options to hedge their equity holdings, it may happen that the options positions the options MMs are forced to take are actually a positive selection portfolio.
Wow didn't realize there is no such that goes into market-making. I thought when you make market, you just enter two limit orders, one at bid, one at ask. I have never been in market-making before, so I have never seen where you specify open and close. Yeah of course, with these delays, not just a fast MM but any traders can hit my old bid/ask. And plus the tags are stupid; if I am putting in 2-way quotes, what do you care if they are to open or close? Quotes is quotes. Thanks for the explanation, Robert.
Massively adverse selection. Unlike cash trading options can get very illiquid quickly. its easy for an informed fundamental funds outsize the market.