if MM will step one penny ahead of me (1.33) , wouldn't the BUYER benefits from it then ? He will get it for 1.33 instead of 1.35. How floor algorithm will stop that ?
Most options will not trade with very tight spreads just as they don't now. The same options that could be a nickle/dime wide , but are 50 cents, will stay that way. It will not be like stocks, that pretty much tightened up across the board, albeit with small size on the inside. Options boys only trade with an edge, and they cant get it with tight spreads on illiquid options.
Take a look at penny pricing in european index options , I think you'll be suprised at what trades , competition is fierce among the market-makers. All good for the customer though.
In single-stocks, my expectation would be that the ats might trade tighter and even that would be a surprise. The idea of an market-makerless exchange assumes that a product is liquid to the point of always having bid and offer at the same time. In single stocks (and even in most indices), there is little liquidity at strike level, instead, there is plenty liquidity at the greek level. I can't see how that could be achieved via electronic peer-to-peer brokerage without a market maker.
The market-makers will be there, its been too profitable for them not to be , but if Eurex and Liffe are anything to go by then the penny pricing will make their jobs easier in terms of less competition from psuedo market-makers (myself included). Advances in software pricing-models (proprietory and off-the-shelf) together with incredibly fast connectivity will mean that the rich get richer. Bid/ask spreads in the options may not tighten-up considerably when penny pricing is introduced, but more trades will be executed inside the bid/ask , maybe the stock options are different from financials and hopefully you wont be affected so much. If there is an advantage in any of this , then its the fact that unwinding a position is far easier because of the tighter markets ! We dont have cancellation fees in Europe for options, but something far worse , a call-around market that keeps the option flow on the phones and off the screens. These market-makers lay off their gammas on the screen when they need to.
Funny thing, there's a bit of a buzz lately about doing away with the penny. allegedly, it cost's us $.013 cents to produce a penny. The TV news run stories of people walking past a penny on the sidewalk....We all probably have a jar or two full of them, and for what? Try and pay for something with pennies, even something inexpensive, they look at you like you're nuts. So here we are debating something being broken down into a unit of measure that may no longer be used in the future.......
The automated algorithm will step one penny ahead of you and offer at 1.33, only if it will be favorable to theoretical value. You can buy this offer, but it will not be disseminated to you by a market-maker unless you give up edge by buying it.
Ever see that commercial where the guy walks through the company bragging about saving $0.05? Everyone thinks he's stupid until he finally runs into the department head. A light turns on in the managers brain as he realizes that they are saving $0.05 on a product that they sell 5MM of. Suppose you scale into an SPX spread 200 at a time, ending up with around 1,000 at various strikes. Say you saved a penny or two on every contract when you opened and closed (also realizing that the spread has at least two legs). In this case the savings will be >$4,000 on a trade that was likely only a one month trade. One or two pennies in this game is a big deal.