The theoretical value algorithms of market makers will go a penny ahead of your clever bids. When you cancel, theirs will automatically cancel. This is automated and could continue indefinitely. You will have the cancel charge, they will not. Automated penny improvements by market-makers is very dangerous, unless you're taking offers and hitting bids, which means, for most people, you're giving up a theoretical value edge as soon as you hit your mouse button. Comment to the SEC. This industry does not give up profits for the shear joy of losing money. One of the top 20 options professionals in the country personally took me aside, and said the real reason for pennies was to eliminate payment for order flow, because options professionals will not pay for order flow denominated in pennies. Comment to the SEC.
maybe true , but not on event related trades ( and that's all what I care). For 1.30-1.35 scenario , I will enter 1.34 ask and SOMETIMES will get a retail trader that match it. Currently , I MUST sell for 1.30 if I want to exit. Again , I am talking trades with unusual volume pace.
Option Trader: IB may make a fortune on cancellation charges. wilburbear: Strongly agree. Why do you think IB makes a profit on these charges? AFAIK, they are passed through from the exchanges. Any idea if NYSE/ARCA will adopt the same anti-competitive cancel fees, pacing restrictions, anti-retail-MM rules, etc. of the other exchanges?
One customer does 50 trade, 40 cancels, 10 fills, IB will charge him for 30 cancellations. Another customer does 50 trades, 40 fills and 10 cancels, IB will not pay him. WIth the exchanges, IB will not pay a dime, because it's 50 fills and 50 cancellations.
Why is this representative of the true distribution of orders/cancels/fills, though? Could one not construct a scenario to show a loss to IB? IB: Do you make significant money on cancel fees?
Some traders have few cancellations and lots of fills (e.g. buying at bid, selling at ask) and some traders change their orders, the net affect is the mass majority of canellations are neutralized between IB and the exchanges. Also, I believe IB charges for cancellations on all exchanges, while not all exchanges charge brokers.
Don't get too excited by penny pricing. Most stuff will stay .05 to .10 wide. MM's are not going to tighten the market. Only small retail stuff will come in and offer a 10 lot at .33. All the size will be at the nickels.
What is an event related trade? The ISE is currently proposing to tighten its cancellation fees (comment to the SEC against this if you haven't already, the Regulatory tab on the ISE website leads to "proposed rule changes", it's either May 1 or May 5. How to comment is near the end of each proposal). Cancellation fees are a disaster in a fast-moving penny environment. As you state, you will only "sometimes" get a retail trader to take your 1.34 offer. If the market moves away you will cancel. If the market moves strongly towards your offer, you will not want to get picked off, and you will cancel. Automated floor algorithms will also step one penny ahead of you, and offer at 1.33, the split second it is favorable to do so. The exchanges may literally have a million penny-denominated price changes in a day, in one option month. You as a public customer will be the one saddled with cancel fees, in the midst of this continual flow of price changes.