sail, Most upstairs traders on the retail level fail to understand unlike stock, there is no "real" orders in most options. When you are buying and selling, you are buying & selling to the floor option market maker. If the MM is constantly getting "picked" off electronicaly , the MM will not make any money and will leave the business. Unfortunately this is what is happening and we will be left with ony four or five large MM firms. Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net
getting "picked" off - WHAT a joke!! When I was a market maker I was very happy when someone traded my markets - that is, how I'm suppose to make my living (trading the spread)!!! If a market maker has an incorrect price and the market is locked/crossed as a result then their auto executions are turned off. So, please expain to me how one "picks" off a market maker?? (ie - everytime you trade with a market maker electronically there HAS to be a spread in the market - so in order for the option day trader to actually pick off a market maker then that trader would need the underlying to move his way just to have a chance to break even or make money - which proves that NO pick off actually took place) Your buddies have become so use to the "free money" days that they don't know what to do when a little competition appears and it will only get worse for them. This is what separates the men from the boys.............. Ask yourself, why is the ISE is thriving. Why are seat prices for CMM's $1.6 million? No shortage of market makers at the ISE!! And by the way all the market makers at the ISE are truly independent of one another. (Not like on the Floor Exchanges where market makers hold hands)
"Most upstairs traders on the retail level fail to understand unlike stock, there is no "real" orders in most options. When you are buying and selling, you are buying & selling to the floor option market maker. If the MM is constantly getting "picked" off electronicaly , the MM will not make any money and will leave the business. Unfortunately this is what is happening and we will be left with ony four or five large MM firms." Dear Gene, As a past market maker on two exchanges, I fully understand that the average option seldom trades (once a week if at all). That's why (in my original post) i said option speculative interest needs to be reconcentrated. I find the current dealer model (with all its abuses) offensive. Who wants to be told all day long that the market in genuine US dollars is bid .95 at 1.05 I only want to see real orders (regardless of how few there are). Anyone displaying a quote should have to trade on it...no excuses... there are thousands of wouldbe market makers/arbitrageurs who are ready, willing, and able to trade on a level playing field... to suggest a shortage of MM's is a serious problem is funny... Anyone should be able to post any bids and offers they like (one sided/two sided) I don't care...as long as they must honor it. We also only need one honest option exchange. The competition among current exchanges is phony. If you give me all the money in your wallet, I will give you back 90% (I really quoted only 50% but competition amongst the 5 licensed money return dealers has driven rates to current ridiculously high quote of 90%)... oh rules require our percentages to be in 10% increments. How will I ever pay the interest on my $500,000 money return franchise fee? Before you know it, the world will run out of money return professionals!
gene, I agree that the MM's in the states are having a difficult time adjusting to competition and a change in the way business is conducted. However, European and Asian exchanges are thriving with one exchange where market makers receive no priority and where prices shown on the screens are honored. Even if it came down to there only being 4-5 different market makers (clearly not the case elsewhere), wouldn't the public and institutions be better off with quotes that are honored. On the electronic markets overseas where access is open to all participants on a price/time priority, if anything spreads have conitnued to tighten.
Def & Sail, I was an Option MM from 1984-1997 on the AMEX in various products. As the situation is now on the exchanges, I doubt anyone could make a living as an independent Market Maker. There is no edge, no order flow and pick off orders. That is the point I'm making. Sail, I doubt you could make any money on the floor now as an independent MM. The situation is that you are now going to trade with Timber Hill, SLK-HuLL, Susquehanna etc. Is this really a fair market where only large firms control the whole market? Before dual listing and .01 spreads in stocks, The Intel crowd on the AMEX was 100 traders and extremely liquid for all customers. Now you have SLK-HULL, Susquehanna and a couple of small MM firms(8 players!). Is this situation really better for the public? Is this a liquid market? I'd rather have single listing of options and better exchange systems . I think the industry is obviously moving off floor and electronic, so we are proably all going to be trading with Def(Timber Hill), like it or not. Gene Weissman Lieber & Weissmasn Sec., L.L.C. . gweissman@stocktrade.net
Gene, I'd agree with you that this would be poor if the markets were wider, less liquid and off-floor traders weren't getting better fills. But this isn't the case. It can also be argued that volume on the AMEX has moved elsewhere due to the specialist system. An example: Years ago I spent a day on the floor of the AMEX. Our screens indicated that we were bid through the specialists offer. I asked our trader why he wasn't doing the trade. The response was along the lines, A: he won't trade with me. B: If I forced him to adjust the prices on the screen, he won't let me do a trade for the rest of the day. Mulit-market listing certainly has limited this type of behavior but from the way things look, it seems that the AMEX has been slow to adapt.
Gene, I have to agree with your suggestion. I would not be able to make a living (after adjusting for overhead) on the AMEX today. While you sight some of the factors, the major reason* is the market is not a level playing field. I don't think your big 4 market making entities could survive in a level playing field environment. You might be surprised to learn that the actual market makers working for your big 4 are just doing a job like hamburger flippers at McDonald's. They don't understand options and wouldn't last long competing against the market makers of 20 years ago. Their bosses obviously understand options, and would try to make the transition to a level playing field environment. But of course they would have real competition and would again find themselves as 4 of many. Certainly not dominant. * an independent MM today must trade on the specialists market with little to no input as to pricing. He must do the bad trades along with the good ... and the specialists decide who gets how much of each. There was always some politics dealing with specialists, but I could usually do the trades that I wanted to do at the prices set by me. (Volumes and allocations are another story.)
sail, you are wrong about suriving in a level playing field. Timber Hill has been advocating a level playing field for years and others within the 4 mentioned are extremely capable in the electronic arena. Perhaps not all will survive but if that is a function of more competitive markets, they will not be missed. Just look at the ISE for examples of capable firms in the US who can hold their own. If you look towards europe and asia where markets are electronic and where price time priority rules, you'll see many firms making competitive markets. Markets on the active exchanges are tight and if there are no markets, once a quote requet is issued, many firms respond with competitive quotes within a second or two. The list of firms responding range from the top investment and commercial banks down to mom & pop shops. I for one am convinced that as the US option markets move towards these types of systems, the end users will benefit. In the end it is not the number of market makers that matter, it is the quality of quotes and executions.
Dear Def, I agree with every point you made. I am unclear as to what you are saying I was wrong about. The mangers behind the major option market firms know what they are doing and could obviously survive in a level playing field environment, they would just not be dominant and have to make some adjustments. I think your making the same point with your examples from europe. Timber Hill's philosophy is commendable and they have practiced what they preach by giving the average joe a "fair shot" at making a profit. This explains your growth and popularity on elite trader. If you guys can bring a level playing field to equity options I'm behind you 100%.
i was addressing this statement: "I don't think your big 4 market making entities could survive in a level playing field environment". I disagree as most of the big firms are already trading globally and I guess i just wanted to make the point that its the number of players that matter, not the number of market makers.