I am mostly trading vertical spreads and iron condors in SPX. Because the bid/ask prices are so wide , I pick up mid price for my order. Immediately after I have a sell order, my price for order is shown in ask value. . I donot care about this but because of this mid price is changed (IB has a mid price column). Anybody else seeing this new mid price might put an order at this mid price. He is cheated because he does not know what was the mid price before my order. This can happen to me as well when somebody's order changes the calculation of mid price and I might use this mid price and it is very likely that my order will be filled at altered mid price. Can I avoid this situation somehow? Thanks for comments and guidance.
No one is really cheated because the new mid truly reflects what is suppose to reflect (mid between bid and ask). The only valid complain here would be that IB doesn't propagate your bid(ask) outside IB (it never sits in a exchange) until it is "marketable" (whatever that means for them).
The midprice is not a tradable quantity, only the bid and the ask. All you have done is narrow the bid/ask by lowering the ask. Nobody gets cheated by you doing this.
Any price can be traded if there is someone who chooses to take the other side. I have often submitted a price that is neither bid nor ask, nor is it mid price, have it never appear on the NBBO and yet have the price taken. This may be an execution within my broker's 'dark pool'... but I will never know that. I think this is primarily where there is a lot of volume, but I have occasionally seen it happen where the volume is pretty low. I have frequently submitted a sell price below the ask and above the bid, never see it appear as the ask AND have the trade taken. So don't think the numbers you see are all that fixed at any one time... especially where there is high volume.
The mistake you are making here, and it's a common one, is the assumption that the mid price represents fair value. So if an options is 1.40 bid and 1.60 offered, you assume the fair price is 1.50. I assure you, it's not. The fair value for that option might just be 1.55 so if you sell at the mid at 1.50, you actually sold below fair value. Like you point out, there are tons of retail one lot traders that come into the market to tighten it and an algo will join with a 10 or 50 lot. There is no "mid-value" price. The best thing you can do is model the option using the implied curve your broker is giving you and try to get filled near the theo value, not the mid point. The skew should be a smooth curve but the bids and offers will be all over the place above and below it. Your concern should getting filled near where the skew is pricing the option.
No, the best thing you can do is to sell above the theo value. I suppose "theoretical" is only as good as the model and the inputs, but I routinely see my broker's theo value come in above the ask or below the bid, and trading continues as if (a) nobody knew better or (b) my broker's calc is busted. I'm betting on (b).
Thanks Mav Any idea how can I get this curve in IB? Even when I use mid price most of the time in SPX my order does not get filled. I have to sacrifice 5 ot 10, or 15 USD before my order gets filled.
A market maker won't trade at fair vAlue unless they nned to for risk purposes. They have exchange fees that they need to compensated for. So you should expect to trade through mid in general as most of the time mid will be close to fair value.
Trading at the mid is the problem. When somebody else has traded at that mid , the mid value changes and that changed value is not fair price.