Your logic sounds reasonable, but in fact when I place a single order at the mid price (especially regarding options with wide bid/ask spreads) the limit jumps right after I submit the order. For example, if the bid is 1.00 and the ask is 2.00 before I place the order, and I want to trade at 1.50 which is the mid price, right after I place the order the bid/ask are changed to 1.50/2.00 and the mid jumps to 1.75. So in this situation, in order to trade at the original mid (which was 1.50) I need to get a fill at the current bid, which I guess is much more difficult. However, when I place spread orders it does not affect the bid/ask quotes at all. Isn't it an advantage regarding getting filled at my desired mid price? Also, I heard that market makers may prefer to trade spreads (as opposed to single orders) since it may enable them to hedge their deltas more effectively. Don't you think so?
In the case you described, most likely the mid point was way below the market makers values. MM run scripts to stay competitive in the market, but not show their best bid/offer. Because you as customer, goes in front of them, if they see value, they will go ahead of you. Yes, MM prefer spreads, but only on large orders. If your entering small lots, they don't notice the change in position. Also, most don't see the COB. I'd be willing to bet that most of the time if you do a spread, your trading with the same 5 or 6 big market makers that monitor the COB electronically. When you get a spread off at a good price, you likely traded with another customer.
Actually almost every time when I place a single order at the current mid it becomes the new bid immediately thereafter (so the mid jumps) and I assume it can't be that every time the original mid point was way below the market makers' value as you suggested. And since it becomes the new bid, it is much more difficult to buy at that price (since it will be buying at the current bid instead of the original mid), so I will have to compromise and increase my limit to the new mid, which will jump again as a result, and so on. Do you have any idea on how to solve this catch? In addition, it is helpful to know that spreads have better chances of execution (as opposed to single orders) for large orders, as you stated. How would you define a large/small order in this regard? Thanks.
Do you have any idea on how to solve this catch? ---- Not really. Your trading options with wide spreads and no market maker will narrow the spread unless he has to. Again, the mid point means nothing to a market maker that has his own values. -------------------------------------------------------------------------------- In addition, it is helpful to know that spreads have better chances of execution (as opposed to single orders) for large orders, as you stated. How would you define a large/small order in this regard? Thanks. [/B][/QUOTE] ------ Different for everyone. In the COB you might see that if you enter a 100 lot spread, you might get a lot of small executions. The automated systems are doing lots of small lots and recalibrating if it would like to do more. With regard to market makers and automated systems, they hedge every order at some point. Spreads require less hedging, so they might do bigger lots. To me 100 lot in AAPL is big and a 500 lot in GE. For Citadel, GS, Timber Hill, Susquehanna, Wolverine, Barcap etc, they run global dispersion models doing trades everywhere every second. I'm sure I've left out someone, but they will be on the other side of most of your trades. It all goes in like soup. There like the honey badger, they don't give a S**T! I love this: http://www.youtube.com/watch?v=4r7wHMg5Yjg
Are delta neutral trades better at getting filled with a market maker? I can split my trades in such a way as to create multiple delta neutral entries.