How do you implement and exit your trades? Lmt? At the ask to buy and bid to sell? Market? At the mid? At the mid and wait for it to fill? Or via a spread? And on a side note, are spread-credit orders implemented as buy at ask and sell at the bid by default? Or do systems like IB constantly search for a mid fill between different options strikes? (if that makes sense). Thanks
Unless trading super liquid options, market orders means getting royally screwed. So I use limit, which I set to either the mid or the price I want to pay, depending on objectives. Then waiting for fill, sometimes for days. Not sure what do you mean by "default" because this would mean market orders. With IB you'd mainly use market or limit orders, so again you either pay what you want via limit, or get screwed. Though IB also offers a few non-guaranteed ways of "trying" to fill orders via separate legs, like first one at limit and 2nd one at market. I didn't play much with these. At the same time IB orders go through their "Smart" router which usually gives more/faster fills on limit orders than other brokers, so IB is doing something right. IB seems to keep some orders in their system until they believe they can get filled, while most seem to go straight to exchanges, which get filled there by the exchange's order matching algos.
In my experience, this is not better. I would rather have my spread order placed on a exchange COB so price discovery can begin at the time I enter my order and I have the opportunity to trade with other customers at other brokers.
Robert, have you ever compared if IB order fills are as advertised? I've had lmt orders for stocks filled that were filled at the same price but marginally faster by my other broker... Happened a few times. They were odd lots but it made me wonder.... Could you also comment on how spreads are filled by your brokerage? Are they scanning for the spreads at the asks, the bids, or do they incorporate mids in trying to fill them?
It is very hard to compare executions with two platforms doing the same thing from the same location. Option order routing is more complex than equity routing. Orders are either sent to a SMART route or direct to an exchange. On most of our software, we pass through maker/taker option debits and credits for single leg orders. We do not track maker/taker fees on spreads. Any SMART routed order-single leg or multiple legs are routed to an exchange order book and posted for price discovery. We do not keep in on any internal option dark pool.
Any time I'm trading OTM, I'll rest the price I want on the option (which is based on theoretical value at a specific price in the underlying) in the hopes of getting hit on a quick spike down or up. When I exit on ITM, they have to be pretty managed, and I typically don't mind paying the spread for a marketable order. I will send market orders sometimes when I know there's hidden liquidity...but only on options for very liquid stocks. It's worth noting that you should get to the point in your trading where your skills with the exchange are a bigger factor in the quality of your fill than your broker. And if you think your broker is getting you good fills, it probably means they're denying you the opportunity to get better ones with more control over your routing. You got a linky to the pricing on this? Still off on the horizon but I will get to the point where I need to diversify across brokers and commission (incl fees / rebates) will be the primary consideration.
Still not entirely clear by what you mean. Assuming a person could get filled at the mid for each leg, would it be better to fill one leg at a time, or would the system try to fill them simultaneously at the mid? Or is the system filling them at the mkt (bid for for short, ask for long)? Spreads often just show the debit - credit received, so the actual fill prices or lmt prices for the current quote aren't shown... Thanks
You're right Robert, in theory. But IB splits some orders and sends them to multiple exchanges when marketable (though all legs go to each exchange as a combo order, just each exchange may fill different qty). While some orders like 1:4 ratio spreads are not supported by exchanges, so IB fills them on their own, probably as different legs and combos, and assumes some risks, as well as potential profit possibly. They state that such orders are guaranteed by IB, but not necessarily filled in a guaranteed way to them. And IB is the only broker that as recently as last year allowed me to do some pure option pricing arbitrage, basically filling invalid orders. I'm just not sure if IB lost money on those, or some market maker. (though I know IB was also a market maker but sold that division after losing money...)
... on a side note, do exchange traded option spreads exist? Exchange traded futures spreads are great, so I'm wondering if they exist for options?