pabst, I agree with you on some of the bond and currency options where spreads are mostly traded (some exchanges have made spread matrices to tackle this with mixed success). however for stock options, the benefits of electronic trading outweigh the cons. The biggest issues of all is the matter of transparancy, equal access, and price time priority - regardless of size. All of these are better addressed on an electronic medium. I'll add that the rules of the medium have to be put in place to protect the rights mentioned above. Nasdaq was always an electronic market place but the rules favoring the market makers made it a poor place to trade. The ECN's came along and offered fairness and have forced the NASDAQ to adjust. Things have gotten better with he multiple listings of options in the states but there is still a long way to go.
Def, How many contracts have you traded on the ISE? I have traded thousands and have experienced all of the illiquidity that I have discussed above. I am not citing a report or journal, I am telling you from the horses mouth that the ISE has a liquidity problem. I can recall countless times attempting to trade under fifty contracts and being filled on only 1, with the other 49 being left pending so they could pick me off when my hedge ran the other way. I tested it one day by telling my clerk to but 100 contracts FROM THEIR OFFER vs. a certain stock level. I took him over two hours and he had to enter over thirty seperate orders to get me filled. Look up the text book/dictionary defination of a market maker, the ISE isn't it. It sucks. As for transparancy, when my clerk had an error purchase (1/4 point over their offer - he bought the wrong issue) we immediately called the clearing firm and they told me that the m.m would not reverse the trade, even though the underlying had barely moved and we had been filled above their offer - that is the only time that I've seen the ISE execute a 100 lot within seconds. When I asked who they were, so I could return the favor when they came to me with a problem, I was told that the identity of the market maker's firm was confidential andtherefore they couldn't tell me who it was. I and every other m.m on the floor, work daily to help the customer through the broker when a problem like that arises. Why? Because a happy customer will return to do business again. A screen will never have that type of business ethic and that is why the floor in some shape or form will evolve and continue. The Knight
Maybe the ISE is monitoring this thread. I just got two edges there(qqq puts) that were so golden I had to check my execution screen twice!!
For a retail customer to trade exchange traded equity options as they are currently structured they would have have to be......(brain dead). It isn't the fault of marketing, they in fact have done too good a job. If the customer is required to get the short end of every trade, pay high commissions of $2 / contract for on average 50 deltas exposure, and face an onerous tax regime how can any one wonder why the customer response has been underwhelming. Sure volume and open interest have been setting records every year, but remove pre-arranged trades etc and adjust for the proliferation of trading vehicles, strike prices, leaps, designer options etc and you are left with the hard fact that volume per listed option contract type is at record lows. In fact the average contract probably doesn't trade once a week. They are not real trading vehicles. Even after all the much ballyhooed competition among exchanges, customers have no serious chance of trading with other real customer orders... only of having options dealt to them at excessive spreads. If by some miracle the customer actually gets the better of the bargain, the floor has the option to break the trade citing one excuse or the other.. As a customer, I can have my trade broken if I enter too many orders, place orders too rapidly, place orders on both side of the market, place orders which are computer generated, or trade with an "erroneous quote" which could be as little as 25 cents too high or low (silly me I should have known). If I do place an order, it can not float up and down like computer driven option quotes, and if I try to cancel it could be a long time before I get an out. Especially if automation has been turned off. Some option specialists are even trying to charge fees for canceling orders. Trading floors are dinosaurs kept alive by anti-comptitive trading rules and special interests. Floor politics is rich by any standard. The best measure of exchange openness could be something ~ volume/seat price. Full automation is desperately needed in the option arena. Island where are you? Def, you have it just about right. The Knight, I'm a little tired of you can do "real size here at the worst possible price type arguments". You can buy/sell genuine US dollars here all day long in any size ...my market $.95 bid at $1.05...who cares
Sounds to me that you are a little stung Sail. Lets consider the facts: Option issues are now multiply listed which has led to tighter spreads than ever before. Spreads used to be a dollar wide, now they may be down to 5 cents wide - if you think that's excessive maybe you are "brain dead". Another thing, traders cannot and do not break an order at will, and we definately will not break a trade if you send us too many orders or send them too fast!!! Maybe you should read your comments again because they really make you seem silly. Have you considered that maybe the problen is with your execution medium? Do you really think that I or any other floor trader is going to try and pick you off on your small order? Let me save you the brainpower...NO THEY AREN'T. In fact if it's less than 50 contracts it was probably executed automatically and it didn't even get announced to the pit, but rather was assigned to market makers on a spoked system. As I've said, for small traders the ISE should suit you fine. If you are a professional or have at least 100 contracts, or 10,000 shares to trade, the floor will provide less slippage than an electronic exchange and therefore will be superior. The problem here is that most of the people don't know what they are talking about...the are a multitude of rules that m.m.'s have to abide by: Spread limits, limits on gaps from previous trades, exchange approval to disengage auto-ex., etc. M.M's are bound by rules and act independantly in a crowd to determine whether or not to fill your order. Do you think that we all are in a conspiracy to screw you out of you 10 lot? Get real... The Knight
Guys, This chat room is taking up a lot of my valuable time. I am logging off but will try to check the posts this weekend. Have a good weekend all - even those that I don't agree with. The Knight
Gee, I guess no one cares that it was posted here about options .25 itm getting automatically assigned, when thats clearly wrong. I wouldn't want to create more victims of a rule clearly designed to benefit the MM's.
knight, re: your 100 lot order. what was the issue and who was the PMM. If it was timber or hull i'd be surprised. Try an order in one of their products where a quote is posted 100 up. as for executing on ISE, I am prohibited from trading options for my PA. I have traded small size on the ISE for test orders using IB's best ex (the order was routed there). I do have experience with systems that have traded thousands of options on all the exchanges and have had meetings with ISE reps visiting Asia. Nevertheles, I will talk to specific people on monday who are intimately are familiar with all exchanges and will make an appropriate posting. stock, i didn't respond to you as your post was off topic. the rules are the rules though. with thousands of clients with open positions i don't think it is realistic for IB to check every open position on expiration. However, possibly the process can be automated with an e-mail. I'll make the suggestion. FYI, in HK believe it or not we have to manually enter into the SEHK clearing system all stock options that we want to exercise 3% within the strike price.
Sorry for not replying sooner Stock, Def and I were having a good discussion and I'm sorry that I didn't get back to you sooner. For market makers, options that are 1/4 point ITM are automatically exercised. Public customers's options are only exercised when they are 3/4 point ITM. The reason for this is due to the lower commission costs as a professional. You can still elect to exercise your options - and some people do - even if they are OTM. In some cases, like the wild internet mania of '99, there was real concern of being pinned when the issue closed even $5 from your strike!!! Sometimes people would exercise their options on Friday expecting news over the weekend, or simply for the market to buoy the issue beyond the extrinsic amount of the option. I AM NOT ADVOCATING THAT YOU DO THIS, but merely sharing some information with you. Def, the issue was EMC. Frankly I (as well as many of the other market makers in the pit) were surprised by the ISE's reaction, not so much in that they wouldn't break the trade (if it hadn't moved and I could scratch the trade I would have, but that's neither here nor there) - but that they wouldn't identify themselves. When I pushed the point and demanded to know who the contra was, I was informed that I would have to go through market reporting / surveillance (it's been over a year so I'm a little foggy on the details) to ascertain the company on the other side of the trade. Another thing - I know and have traded with several people from Timber, Hull, Knight, Wolvering, CTC, etc and when I told the crowd the story that I am telling you now, we all agreed that it was bullshit. On a positive side for the ISE, the execution speed is fantastic. I occassionally go away to other exchanges to trade, and by the time you tell the clerk what you want to do, he calls a broker on the exchange (hopefully with the correct instructions ), the broker goes out to the pit to get the order (which in all of that time, any edge is propably gone) and fills the order and gets you a report which the clerk gets and then tells me, it's tough to make money. I like the concept of an electronic exchange, I really do. It has just been proven to me thet the liquidity is lacking and must be improved. Ultimately the market must give the customer what s/he wants - liquidity, fair markets and rapid fills/confirmations - any entity that does not, be they electronic or floor based, will not survive. The Knight