knight, as for liquidity on the ISE, doesn't it depend on the bin and the specialist. It is my understanding that the bins where the primary market makers are Timber Hill, Hull and even Morgan Stanley show size and honor their quotes.
Hello Def, It's been about six months since I attempted to execute trades on the ISE, and the major problem with it is liquidity. Issues I have attempted to trade with them on include YHOO, EMC, MSFT, CSCO and NOK. When attempting to get 100 contracts off on their market they frequently would only trade 15 and at times only 1!!! These are not minor issues and I'm sure that the respective frims that you mentioned definately would have a presence in their trading. For real option traders the option markets to go to, in order are: CBOE, AMEX, PHIL, PSE, ISE There are exceptions to this list, since some exchanges still are considered the primary market for some issues. Bottom line the ISE is not reliable because they will not trade at least 100 up, or even 50 up, on their markets. Prior to responding, I spoke with a friend of mine who assures me that the situation with the ISE is still the same. That aside, do you have any leads in NYC for me to follow up? Thanks in advance, The Knight.
knight, I differ with your order of exchanges - especially the AMEX where the specialists are notorious for turning off autoex and taking their time with orders. For a good example, take a look at how most direct access traders seem to prefer island over the amex on the QQQ's. Nothing beats an electronic exchange. Unfortunately the ISE has rules that allow market makers to back away from what they show. Thus if you are an active trader it makes sense to know who the specialist is: In any event, the ISE has a web site below is a list of products with the bins they trade in. http://www.iseoptions.com/product_info/all_symbols.asp Here is a list of PMM's and their respecitive bins: Primary Market Makers: Adirondack Electronic Markets LLC (Bin 3) Banc of America Securities LLC (Bin 6) Bear, Stearns & Co. Inc. (Bin 5) Deutsche Banc Alex. Brown Inc. (Bin 9) Knight Financial Products LLC (Bin 1) Morgan Stanley & Co. Incorporated (Bins 8, 10) SLK-Hull Derivatives LLC (Bin 2) Timber Hill LLC (Bins 4, 7) I can speak pretty confidently that Timber Hill will honor their markets and if size is shown you will get your fill. I believe Hull will do the same and I heard Morgan has started to so. I have not heard great things about the other bins. YHOO- bin 8 EMC - bin 4* (timber hill should be around 100 up) MSFT - bin 10 CSCO - bin 9 NOK - bin 10 Again I restate, If you're looking to trade size in the options it is worth the time to see who is the PMM. As for who to trade with: If you need funding, I can't help your there. I'm sure there are a few firms that will give decent access and funding but I don't know of any offhand. If you don't need funding, ofcourse I have to recommend IB. The benefit of IB"s software is that by using the best algorithm it will fill orders on all available exchanges.
I stand by my previous statements regarding the ISE, and the ranking of the exchanges. As for AMEX market makers (of which I currently am one) you cannot simply turn off the auto execution system - it is done when the issue goes into a "fast market" and requires the approval of an exchange official. As for "taking their time with orders" we operate under an open outcry specialist system. Unlike an electronic market maker and listed specialist who has the rediculus privilage of having 90 seconds to decide whether he will fill the order and can leave you hanging for that time (which can seen like an eternity at times), as a market maker I have to be faster than the trader next to me and/or give the best market to get in on the order. Once that trade hits the pit/post it is taken down within seconds and must be disseminated immediately therafter. If you are having a delay, talk with your execution medium because I (and every other professional market maker) will execute the trade within seconds. As for "nothing beats an electronic market" - bullshit. We will trade size and will make a market in any market condition - yes it will be wide if the market is going to hell but you will be given a two sided market. Do you know what an electronic market maker will do? The same thing that they did in '87 - "sorry were're having system problems and are unable to fulfill our obligation to the marketplace". Another thing - if you are trading under fifty contracts most exchanges will execute the order electronically. As a floor trader I do not want the order to go somewhere else and I want the customer to be happy. You also say that "direct access traders seem to prefer island over the amex on the QQQ's", well it depends on the size of the order - try to trade 500,000 up on island; the specialist and the qqq crowd will take it down on the quoted market. How far will an ecn fade? Your responsibility as a market maker is to make honest and fair two sided that markets, and to honor the size that you show. Make markets and trade the size that you show under normal maket conditions, the concept is not that difficult. I gave up sending orders to the ISE because they will not honor their markets, and try to pick you off by filling you on a small portion of the order - leaving the balance unfilled and pending - and then trying to fill you on the balance when the market moves against you. That is not market making, it is chopshop bullshit and the public deserves better. The Knight
i can't argue with you in regards to the market makers who do not honor quotes and that is a problem with the ISE. regarding the amex. if things are as you state, they certainly have changed since I spent some time down there 7+ years ago. It doesn't address why so many people claim to have poor fills on the q's (sure small size). I've been in pits and i've been involved with electronic market making. I am certain electronic markets are doing a superior job of providing liquidity and transparancy. I remember 87 and other fast markets where where no one was to be found as well on the trading floor. To be fair, I also remember after Sept. 11 where we (timber hill) were the only firm willing to make markets in the stock options for a few days in Hong Kong. Nevertheless, twice the average volumes were traded those days. as for electronic trading, your arguments are typical in stating that if there is size open outcry is better but somehow the european exhanges continue to trade record volumes, ditto for korea and other markets in Asia. The rules in the states are the problem. The ISE allows firms to back away, IMO if it didn't it would dominate over night. In fact, it shouldn't have a PMM system. It should just have a number or market makers competing on price/time priority along with anyone else who wants to directly place orders. Many of these firms that are backing away are specialist on the other floors, why would you expect their behavior to differ when they can and are doing it manually. As for size, the average order is not 500.000 contracts. It may be more like 5-10. Nevertheless, the same arguments where made on the LIFFE who were naive enough to brush off the eurex when they launched the Bund future. Needless to say, the LIFFE after suffering greatly and basically losing the contract, are now fully electronic. Neither medium is perfect. However, overall electronic trading platforms have proven to be superior and more equitable when going head to head with open outcry. this is an argument well documented in many journals and trade publications and no need to continue the battle here. The fact remains the days of open outcry are numbered. Hopefully, the US exchanges will eventually get it right. I should mention, my opinions on the AMEX have nothing to do with those of Timber Hill or IB (timber hill is a specialist in a number of markets, and IB routes significant volume to the exchange).
Nice disclaimer at the end Confusion regarding average size of 5-10 in the qqq's. Average pit volume size will be significantly larger than that. By the way, the 500,000 was in reference to the qqq etf. You have referenced European and Asian markets - of which I am not an expert - Have they really done better now that they have been automated? Do the markets have depth or are they superficial? How do they react when they are really needed (in times of panic)? I seriously question your claim that anyone in the recent market conditions has been trading record volumes...I think we can agree that the past few months have been tough. As for the electronic vs floor trading debate: Undoubtably the future of the markets is toward automation. I also believe that the floor will survive though, because having the interaction between broker and trader/specialist will ensure that the customer's order will be filled irregardless of the market conditions, and you and I both know that the faceless electronic trader simply wil not provide liquidity when the market requires it. I disagree with your belief that for option trading, electronic mediums are superior. I've seen them both and as I addressed, the problen is liquidity for sizable markets. If you are a 10 contract trader then electronic is probably better. Another problem for option traders on an electronic exchange is any type of spread order. How do you execute them? One leg at a time - this defeats the purpose of engaging in the spread to begin with. With regards to trading reform: The 90 second rule needs to be abolished. With the technological advances that are available today, 10 seconds delay time to decide whether to execute an order is more than adequate. Secondly, all options quotes should be at least 100 contracts up, except in a fast market. The uptick rule should be abandoned. Listed issues should also be dually listed - this will provide market participants with an alternate execution method. With regards to the exchanges "getting it right", I think that the various exchanges are making concerted efforts to meet consumers demands regarding fair dealing and fill notification. I agree that no system is perfect, but I would be concerned if my only trading medium was electronic. I also question your journal reports asserting that electronic trading is superior to the exchange. These are probably also the reports that advocated .01 cent spreads - that has worked really well hasn't it? To anyone else reading, feel free to chime in... The Knight
I just had the unpleasant experience of 'assuming' that some options I held would AUTOMATICALLY be assigned as they were in the money by 60 cents. This was on a low priced stock. They were not. My investigation after the fact, seemed to show the OCC has a 75 cent cut off for auto assignment of options. I noticed that The Knight said options ITM by 25 cents were automatically excercised. Frankly, I was a bit shocked at the wide 75 cent number I saw posted in various faqs. Now I'm not so sure IB didn't drop the ball, or at the very least has a policy not friendly to the customer. ------------------------------------------------------------------------ From EquityStation.com Automatic Exercise Unless instructed otherwise, EquityStation will exercise all long options that are ¼ of a point or more in the money for an equity of .01 or more in the money for an index using the closing price from each stock's primary exchange. ------------------------------------------------------------------- Now I'm pissed at myself and IB for an unnessary loss. Any comments?
Just found this lovely ditty, which may explain what happened. If someone can explain the justification for the dual pricing scheme, I'd love to hear it. 2) every option contract of each series listed in the Clearing Member's Expiration Exercise Report that has an exercise price below (in the case of a call) or above (in the case of a put) the closing price of the underlying security by (i) 3/4 of a point or more, if the option contract is carried in a >>> customers' account <<<<, or (ii) 1/4 of a point or more, if the option contract is carried in any other account, unless the Clearing Member shall have duly instructed the Corporation, in accordance with subparagraph (b), to exercise none, or fewer than all, of the option contracts of such series carried in such account. If a Clearing Member desires that any such option contract not be exercised, it shall be the responsibility of the Clearing Member to give appropriate instructions to the Corporation in accordance with subparagraph (b). Amended October 18, 1995 I'd prefer to have an 'other account', where do I sign up?
knight, i was referring of 5-10 as the average size of option contract in general- not qqq's. Have they really done better now that they have been automated? The following data is from FOW magazine for October. Exchange Contract oct volume mode of trading KSE (korea) kospi 200 options 99,174,779 electronic France cac 40 option 12,674,839 electronic Eurex dax options 5,390,560 electronic Eurex dow jones euro stox50 7,082,637 electronic CME es minis 3,632,774 electronic KSE kospi 500x index 2,918,295 electronic CME S&P 500 index 2,588,295 open outcry CME emini nasdaq 2,373,045 electronic As for stock options, CBOE traded 23 million contracts, stockholm - 36 million, eurex 11 million, .... I don't have figures for the other US exchanges. The US used to dominate total volume in stock option and futures trading. This is no longer the case as I believe the EUREX is now the number one exchange in terms of total volume (outside of Korea where the contract size is smaller) Thus to answer you question, the answer is a resounding yes. The markets on these exchanges are real and honored. If you show a price and get hit - you are instantly filled. Given the volumes i don't think you can question whether the depth is superficial. I did not say volumes hit records after Sept. 11th. However, I can attest that the stock option volume on the SEHK doubled for about 3 days afterwards. It has since returned to lower levels and during the holiday period has been quiet. the interaction between the broker and the specialist may help in illiquid stocks but I don't think it adds much to active or even moderately active markets. Competition - ie. allowing free and open access to the markets tightens the spreads. Market makers should receive fee benefits for responding or mass loading quotes with certain sizes. However, there should be no impediment to the retail guy who wants to place a 1 lot in between the markets. first come first serve. Size can and does trade very effectively on electronic markets. This has been proven on the overseas markets that are completely electronic. Spread orders are an issue. However, some exchanges have bulletin boards where you can place spread orders (australia trades a large % of their volume in this fashion), others have sufficiently tight markets where spread trading is easily legged. On each of these exchanges nothing is stopping brokers from getting spread orders and talking to a number of market makers and participants in order to tighten the spread and cross a trade. Not perfect but better than nothing. i agree 90 seconds should be abolished but even a 10 second delay is too long. In short, there should be NO delay. If a market is posted it should be honored - no exceptions. Why post something if you are not willing to honor it? about the 100 up size - i disagree. Maybe for market makers but you have to take factors like volatility, liquidity of the underlying, and spread of the underlying into account. Again, competition amongst market making firms and the public will naturally lead to tighter markets and larger size. Dually listed? - how about one exchange with equal access that requires orders to be honored by price/time priority - no specialists required - no special favors. This seems to work elsewhere and would benefit all participants - save the specialist and market makers. About the exchanges making a concerted effort - sure - only when their hands are tied. The effort the US exchanges have been making, IMO are pretty lame. For example, what about the recent push by the exchanges not to allow retail from acting as off-floor market makers. I think the options exchanges in the states have a pretty poor track record of doing what is best for the retail investor. As for my reports on the benefits and superiority of electronic trading, the success of electronic trading outside the states in derivatives and inside the states with listed/nasdaq stocks (ecn's) make a pretty strong argument.
This has been a great thread thus far. Perhaps I can summarize and meld terrific points both by The Knight and Def. Electronic markets when in infancy rely greatly on locals or MM's from open outcry venues joining the bid or offer on the screen in hopes of getting an edge that they can't get in the pit. LIFFE locals unwittingly "made" the Eurex a success much the same way that bond locals at the CBOT are amongst the biggest volume traders on ACE. Single option month markets(futures) have the least viable reliance on a local population. That is why bonds and stock indices that trade predominant in-front have made the transition to the screen so readily. Markets that have diverse pricing needs i.e. options or Eurodollar futures or even ag commodities are greatly dependant on spreaders to make markets. No one trades a naked call on the floor, that trade is packaged against another strike, month, or wherever else an edge can be had. Same thing if you want to buy a Mch 2009 Euro. Where is the seller going to go? To another back month, of course. now he has a spread on, probably one of many just like at the CBOE where a trader may have a position with 20 different variables in one option series. Thus until spread trading, including ratios and calendars is achievable on the screen, (and think about how difficult the logistics will be, given the thousands of combinations)us screen traders are going to be greatly at the mercy of market makers who are only going to hit us when the other side(transparent to us) is a do.