In short, the title says what I'm up to. I saw a recent discussion here stating this is a bad idea ("You just can't build a model that works as non-member to compete in equity options." - Robert Morse), but at the same time another member says this might be a great opportunity ("The options industry is going through a new evolutionary period in the liquidity equation. Many of the midsize firms have left and the very large and the smaller MM's are pretty much the survivors. If you want to really make markets I would spend the time looking at what it would take to mount the effort. If another major chooses to exit - the vacuum created could offer a major opportunity." - ajacobson). My reasoning is that if I'm able to do arbitrage through Interactive Brokers latencies then I know enough to also be able to do market making. Like, I know what I'm looking for in making money off others, then at least they won't be able to make money off me in the context of my models and strategies. Stuff works wonderfully in backtests but the major question is: "will I get executions on join orders?". And the only way to find out is to implement a market-making system which is able to manage at least hundreds if not thousands of quotes. In the meantime of course, I can always polish my arbitrage and research new ideas (got more lined up than time to work on them). Anyone else here who's doing market making?
Is it FIFO on equity option exchanges or does the market maker have privileges that mean they get filled and you don't?
"does the market maker have privileges that mean they get filled and you don't" Well, I'd be the market maker, what privileges? I'd use single limit orders through their API so definitely no privileges here.
The market maker pays for a seat and in return their bid/ask gets priority over a customer bid/ask when retail orders come in. You will only get filled if the market moves against you while the market maker has pulled his orders.
Well, that's one aspect to consider but for now it's not a priority. Another one I have to think about is weather or not it makes sense to open-source such a system. I mean the part which is non-proprietary, a pretty hefty one actually: marketdata, order management system, positions & pnl, risk, GUI interface. The proprietary part would be the calculation of bid/ask prices. I'm not aware of the existence of such a system on GitHub. And given my experience with the finance industry, I'm not keen to provide one for my competitors. Also, knowing the insights of how such systems are implemented, I'd very much avoid paying for a closed-source one and instead have full access to the source code and modify / customize it according to my wishes and competence. So, to open source or to not open source? a) If I open source there's a very slim chance I might get some help on the non-proprietary part so things would go faster. But my experience matches what one guy once observed, namely that there are higher chances of meeting a talking potato riding an unicorn on the way to a leprechaun pool party than finding a developer willing to work for free. So I'm providing my competition for free with a stub they can develop upon for the hypothetical chance of some hypothetical help. b) If I develop close source, then I don't get any help apart from what I can pay for, which is my own spare time after the day job and perhaps some small punctual tasks on Upwork. Or better not, if I provide my sources to some random guy in India, it'd be the same as #a and I'm also paying for it. I suppose it's gonna be #b.
If it is really truly your dream to become a MM then go for it. Technology will be expensive and you'll certainly need at least one or two people for backup. You won't be a MM through a brokerage house, but you'll need to become an exchange member or lease a trading right. As an MM you will have to make two sided market and you won't be able to pick and choose when you want to trade. There are boutiques in most exchange cities that can help you set up. You'll probably want to start on one of the smaller exchanges like MIAX or BOX. Reach out to the exchange membership department and they'll help you with the process. You'll significant capital for technology and trading. You can buy off the shelf market making from technology vendors and the exchanges can suggest technology partners for their platform. It will be a full time day job and depending on which platform you choose will require at least seven figures of capital. You also might want to consider trying to find a position at an existing MM firm and they live predominantly in Chicago, New York/New Jersey, Philadelphia and San Francisco. Forget about making money in names like SPY,APPL and BAC where the competition is dominated by the technology heavy(Speed) bulge bracket market making firms. I cannot stress enough that you will have to make two sided markets and you'll need to be quoting hundreds if not thousand of series. Having said that - if that is your dream don't let anyone talk you out of it. Pick an exchange - reach out to them for details and go for. I'm in the suburbs of Chicago and a handful of my neighbors are CBOE MMs working out of their homes. Their servers are colocated. The CBOE, with the exception of the SPX and VIX, is driven by off floor marketing making.
I thought I read somewhere that the opposite is true about fill priority, that is, that customer orders have priority over orders of designated market makers. I think the DMM's got more liberal margining, and, just guessing on the rest here, maybe the right to simultaneously post buy and sell orders for the same option, and maybe a better deal on fees. My initial web searches, however, have only turned up hits that might or might not support my understanding or might indicate that it varies by exchange: "Customer orders that are entered at the same price as a member’s order will be given priority over the member’s order." -- http://www.investopedia.com/study-guide/series-4/options-market-place/priority-option-orders/ "NYSE Arca Options offers a price-time priority trading model [...]. NYSE Amex Options offers a customer priority trading model [...]" -- https://www.nyse.com/publicdocs/nys..._NYSE_Amex_Options_NYSE_Arca_Options_Work.pdf In the course of doing those web searches, I also noticed the "spread priority rule", which you might want to check into if you are not already aware of it.
Thanks @ajacobson for encouragement. @toonerdy: "Spreads and straddles require the execution of 2 trades to complete the position. The spread priority rule gives priority to 'combination' orders that requires 2 positions to be filled at 1 net debit or credit". I'm not aware of the existence of an all-or-nothing spread order on regular exchanges (I've seen such things as OTC quotes). What I encountered so far on exchanges, it's still individual orders. So priority I think it's only a best effort and you still may get a fill on only one leg and be left with a single-option strategy.