There are many markets where options are not liquid, e.g. Cocoa, Soybean, etc. and where most of the volume is still done over the phone or through a human broker / chat. Options MM try to make a market for these illiquid markets and hedge it with futures or by back-to-backing it with other clients. At expiry, the cost of delta hedging is usually cheaper than the price vol they sold it for. Depending on how the vol is priced, I know MM that can make up to 150$ per contract, but they have access to retail flow (e.g. commodity producers in Nigeria are not really good at calculating the market's vol from an option quote and can hit you with big volumes)
No. It says nothing of IB's brokerage. It should concern you with respect to running a highly liquid options strategy. If virtu, knight, and timber hill can't make it work then bid/ask spreads are probably unsustainable and have to widen to encourage market markers to quote.
Just discussing what I observed. If you know something about how IB's broken SMART Order works, share it. If you don't want to, F off!! If my post is BS to you, put me on "Ignore". No need to be so upset about unless you are related to IB? LOL
I would like to learn something from this thread but I still don't understand so much about the figures. 1. Whether the $22m market making loss amount was/is a small/insignificant % in terms of IB's annual total profit/loss, or not? That could be completely irrelevant to the $6b equity (from clients deposits? Not net worth?) 2. Was that $22m a one-off amount for making markets operations or for closing down the huge operations for good, or a mix of part profit and part loss? TH should be a profitable operation for years, otherwise why keep it for so long? 3. Was that $22m a mark to market position which was possibly the highest level during TH's MM history, or the lowest, or just fairly normal (actually not worth to mention)? 4. As IB is a public listed company, there should/must be whatever explanations directly from IB officially for closing TH, what was it? It seemed there was complains about TH for conflict of interest as being IB's main MM. Also TH was once not part of IB group companies (separate and private)!? 5. ,,,?
Peterffy thinks "the big one" is coming, and he does not want the book risk anymore. Trimming the book till it disappears is easier said than done. That's why the costs. Bring me your finest meats and cheeses, OddT.
IB made $761, $458, $506 million in EBT in 2016,2015,2014 respectively. $22m sounds a lot but it is one week and half of their earnings before tax. Yes, it was a one-time cost. MM operations will cease to exist in few months. MM making is a tough business. They could have easily sold the MM operations to a competitor but they did not want to give their valuable intangibles (patents/software) to competition and decided to close it down. Also, investors were not happy about MM operation’s earnings volatility even tough MM business has been profitable every year for at least the last 3 years. For further details please read IB's earnings call transcripts and their SEC filings. I have come to conclusion that IB is one of the safest, if not the safest broker in the world. I would rather have my money with IB (90%+ of my net worth is with IB) than GS or MS. If you do not believe me, read their filings and compare them with any other broker you want. They will have a monopoly for professional investors in couple of decades. It is extremely hard for anyone to start a brokerage business these days with less than one million dollars in daily revenue. Oh and by the way, MM business made a fortune in 08/09. MM made $330m in 09 and $1027m in 08.
They are not dumping the MM operation because it is unprofitable. They are dumping it because it is very capital intensive, and variable. They don't want the risk anymore. Much better risk profile and less capital charging fees to traders than providing liquidity. Since they have grown so much, they just prefer the prime rib, over the burgers. Besides Peterffy is getting old and is already very rich. Risk taking is a hassle.
imo, competition that offers consumers alternatives would be healthier than just monopoly. Furthermore, a monopoly business would be easier to fall while without any competition. Besides maintaining poor service quality. Just 0.02.