Freehouse, FWIW, I've seen this stuff first person, I'm an ex-MM on the floor of the CBOE. I'll be the first to admit that the electronic exchanges have some benefits, but I also have to admit that it cracks me up hearing people bitch about the MMs games. Before anyone automatically assumes the MM/specialist screwed 'em by not cancelling the order, ask yourself what you were trying to do in the first place, the answer--pick off the MMs. So you want to complain about getting picked off when you were trying to pick them off Also, why not bitch that your broker was too slow to cancel the order, but if I'm in the pit and your trying to buy calls a little below the offer, and the stock starts going lower, I'm probably gonna hit your bid as soon as the stock downticks--there's no way you can cancel quick enough, that's your fault, not mine, not the exchanges, not the brokers. When an option trades ahead, it's hard to tell what the reason is, could be your broker wasn't doing his job, there was another order ahead of you, it traded as part of a spread, so just because you see your price, doesn't mean you should be filled. I realize that there are slimeball MMs out there that do abuse their priviledges, but not all of them are like that. Eventually there will be no floor, but don't think that the games will end, it's just a computer program away from dealing with an electronic slimeball Sorry to go off on a tangent, and I'm not directing any of this at you Freehouse, but it cracks me up when people bitch and moan about the MMs screwing them on their 5-lot--I got news for ya'll, they don't give a rats ass about your 5-lot, with a 10-20 cent spread, they ain't gonna do that much work for maybe $50 worth of theoretical profit. Hope this provides a little insight into the floor and some of the reasons behind some of the common complaints. I'd be more than happy to try and rationalize why certain things happen if anyone has questions about floor trading, feel free to fire away. Gotta run, Joe Retail is wants to cancel his 2-lot and I have to fill him before he cancels Just Kidding, Vega
I agree that cancel fees are a friggin joke, and don't know what else I can say about that. As far as the bid/ask thing, I personally think that people are going to be getting a little to much rope to hang themselves. Initially they'll be giddy with being able to bid/ask at the same time, until they start accumulating a position that they don't want, because when you're market making you rarely get to make the trade in the direction you want, your job is to provide liquidity, and manage the risk. Once again, I'm not trying to start a war here, and yes there are some bastards at the exchanges, but I just don't think that this is really going to be the second coming. Vega
And try to guess when we have the first thread about negative experiences on the BOX I'll go with less than two weeks from today !!!! Winner gets a 10-lot of Enron calls Vega
at least everyone has the same rope. currently MM's and specialist have the playing field tilted towards them. BOX levels the playing field further.
I'm with you on this bet. The BOX is, to some people here, some sort of utopian exchange where the customers finally have the opportunity to get an edge. You are delusional, if in an absolute free-for-all you think you can make money when you coudn't make it in the current structure. If you can't decide on which is the better side right now when spreads are .05 or, at most, ,10(and trust me, one those sides is a shitty trade) in the liquid stocks, how are you going to do it when it is smaller than that? For some, it will be great(including Timberhill) because their trades don't depend on a wide bid ask or they are savvy enough to enter orders at the optimal times. Don't get me wrong, some of these rules are bullshit but aren't an impediment to profitability. A lot of the griping has to do with pick off orders and the fact they aren't cancelled quickly enough, are charged a fee when they do, get a fill when they don't want one or get busted. It's garbage, like Vega said shennanigins do exist and I've seen it myself, but it isn't to the extent to which you think.
Def, Vega(probably) and I would disagree in that both CS and MM maybe handed a similar piece of rope with the BOX, but that doesn't mean the CS was handed a different one than before. To be honest, I am kind of worried about this. In my mind, I think this benefits Timberhill and the quant groups of the world which is why I have Hull and Wilmott books on my shelf plus a shitload of math from the last year(this is for another reason, but it does come in handy).
sure, one of our theoretical edges is speed but we don't have a monopoly on fast computers and brains. as long as someone has the capital and ability to provide 2 sided quotes, they can be a MM at BOX. i.e the barriers to becoming a market maker at BOX are very low. i think the real issue with the options exchanges is that on some of the exchanges displayed prices are not always honored and the barriers to entry along with the preferential treatment the specialist or DPM gets in a given series bring into the question the fairness of the market. no one in their right mind should think the advent of the BOX is some ticket to print money. However, it should level the playing field a bit. If anything competition amongst market makers should increase if it does well. it's simple math, it costs over 1 million dollars to be a market maker for onr of the 8 or so tranches at the ISE. At box the figure is 0. In regards to Timber Hill (and other with automated systems). We are most likely to make live 2 sided markets in most strikes as well as instantly respond to quote request. Thus, optimal order entry is not necessarily a factor. If anything, showing our prices tips our hand. The main incentive for providing tight markets is to participate in any PIP. This incentive exists for anyone showing the best price and thus will hopefully attract numerous market makers.
"((The BOX is, to some people here, some sort of utopian exchange where the customers finally have the opportunity to get an edge. You are delusional, if in an absolute free-for-all you think you can make money when you coudn't make it in the current structure. If you can't decide on which is the better side right now when spreads are .05 or, at most, ,10(and trust me, one those sides is a shitty trade) in the liquid stocks, how are you going to do it when it is smaller than that?))'' Trajan, You're missing the point. BOX isn't about giving the customer an edge. A level playing field is about reducing the "edge" of the MM. The liquidity they provide is currently not worth the (enormous disadvantage) cost to customers. I personally would prefer not to see any quotes that are not firm and available for instantaneous electronic execution. If that means no quotes or one sided quotes so be it. I will (if BOX ever happens) very selectively be able to provide some liquidity at a far lesser cost than currently available. The MM's know it and currently prohibit me from doing so. I'm not expecting to make large profits. Competition drives profits down.
I think that's the key if this thing has a chance of working, being very selective. And I agree with Def that it does "give both sides the same amount of rope," I just think that the new customers are more likely to get "rope burn" than the current MMs. I envision some folks making markets in 5 or 10 options at once and having all of their offers lifted or bids hit as the stock moves against them, and then scrambling to get out of several positions (at a loss). As I've said before Timber Hill is an outstanding firm, and they and others like them will be more than happy to pick off some of the newbies in the early stages of this exchange, for the livelihood of the BOX I can only hope they don't take all of their money before this things gets off the ground. Just because people are on equal ground doesn't mean that all people are equal. It's like going from swing trading to scalping, and will take some time to learn to be a MM, hopefully they have enough bank to last thru the adjustment period. As I've stated before, I'm not trying to start a pissing contest with anyone, I just think a lot of the contempt people have for the exchanges translates into a false sense that what the MMs do is easy, and if you thought that the games the MMs play with you suck, just wait until you start getting picked off by Morgan Stanley and Goldman Sachs, then you may understand a little more on why sometimes the MMs don't honor their quotes. Hope this thing works, but right now I have it at about a 40 delta. Vega
Vega, I've been a MM on two of the floors for several years so I don't consider myself a newbie. I know MM's get picked off by upstairs firms (with knowledge of where the next few prints will be). That still doesn't justify not honoring quotes. When goldman comes into the crowd trying to do a 200 lot IOC on the bid or offer just trade the minimum, fade and overhedge!