This was published in WSJ under paywall WSJ News Exclusive | High-Speed Trader Simplex Warned About Potentially Abusive Options Strategy BySamarthPophale November 2, 2022 0 250 Simplex, a Chicago high-speed trading firm, has pulled back from the lucrative business of handling individual investors’ options orders after receiving a warning from a Wall Street regulator over a potentially abusive trading strategy. The Financial Industry Regulatory Authority notified Simplex that the strategy—which traders call “signaling”—appeared to violate market rules, people familiar with the matter said. Signaling is a way for a trading firm to monopolize a stream of individual investors’ options orders, while shutting out rival firms that might also want to execute those orders. It is essentially a way around rules in the U.S. options markets that require all orders to be sent to exchanges so multiple players in the marketplace can compete to execute them. Some options exchanges have said signaling could be a form of market manipulation. Simplex executives believe the firm did nothing illegal, the people said. By capturing a stream of individual investors’ options orders, Simplex would have been able to keep all the profits from trading with them and not split the proceeds with competitors. Simplex is an options market maker, meaning it trades option contracts throughout the day, making money by buying at a slightly lower price than it sells for. Market makers find it attractive to fill individual investors’ orders because such investors are unlikely to have better knowledge of price moves than the market makers themselves. Small investors also tend to trade less-active options contracts with wide spreads between the buying and selling price, creating profit opportunities for market makers. The scrutiny of Simplex comes as regulators are examining how brokerages and electronic trading firms handle individual investors’ trades. Newsletter Sign-up The 10-Point. A personal, guided tour to the best scoops and stories every day in The Wall Street Journal. In mid-October, Matrix Executions—a firm affiliated with Simplex that handles options orders for retail brokerages—unexpectedly told brokers to cut back the volume of orders they were sending to Matrix, according to people briefed on the decision. Matrix told some brokers to reduce their order flow by 99%, the people said. Filings show Matrix handled options trades for brokers such as E*Trade, Tastytrade and Webull as recently as September. Matrix is majority-owned by Simplex. Representatives of Matrix and Simplex declined to comment. Options traders said they began to notice earlier this year that some firm or firms were engaged in what appeared to be a signaling strategy. Traders at one large options market maker said they spotted a pattern in which a retail order would be posted on an options exchange and canceled almost instantly. Then, within about two millionths of a second, another order would be posted—identical to the first except for slightly different price terms. Next, before any other firm could react, someone would swoop in and trade against the new order. The traders at the large market maker, who shared their analysis with The Wall Street Journal, said the pattern repeated itself up to 15,000 times a day and persisted for months. They concluded that a rival was engaged in a signaling strategy, passing information between two parts of the same enterprise that are supposed to maintain an arm’s-length relationship. Options exchanges published a series of warnings against ‘prearranged trading’ and ‘signaling of imminent orders.’ Photo: Scott Olson/Getty Images Big U.S. options market makers often have what’s known as a wholesaler unit that takes orders for retail brokers and has a regulatory obligation to seek the best executions for clients. The first, quickly canceled order appeared to be a signal from a wholesaler unit, alerting its affiliated market-making arm to prepare for an incoming order. Several market makers became aware of the pattern and complained to exchanges, according to the options traders. One of the market makers raised concerns with the Securities and Exchange Commission and Finra, upset because the signaling strategy was costing it money and appeared illegal, one of these traders said. An SEC spokeswoman declined to comment. In a statement, a Finra spokesman didn’t directly address the Simplex warning but stressed the importance of the regulator’s best-execution rule. “At its core, Finra’s rule requires that firms direct customer orders to markets with the most beneficial terms for those orders, and this central principle applies the same in the options markets as it does in the equity and fixed-income markets,” he said. Although Simplex is small compared with market makers such as Citadel Securities and Susquehanna International Group LLP, it has been growing fast. Some of its growth has come from its use of payment for order flow—a practice in which high-speed traders pay brokerages for the right to execute small investors’ orders. Simplex traded 16 million options contracts under such arrangements in June, up from 2 million the same month last year, according to research firm Alphacution. As traders complained about the signaling strategy, options exchanges published a series of warnings against “prearranged trading” and “signaling of imminent orders.” On July 27, for instance, Nasdaq said in an alert that it could investigate and pursue disciplinary action over such schemes. Similar notices followed in August and September from BOX Options LLC, Cboe Global Markets Inc. and Miami International Holdings Inc. Nasdaq, BOX, Cboe and Miami International all declined to comment. Traders at the large market maker said the mystery trading pattern came to a halt in mid-October. Write to Alexander Osipovich at alexo@wsj.com Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
WTF that "error connection to database" error is stupid. At least with paywalls before, it still shows you the article now it shows you nothing. How are people going to know to pay? LOL
Honey, they are not allowed to redirect, but it works now. We appreciate your color on the Simplex story. https://finnoexpert.com/2022/11/02/...d-about-potentially-abusive-options-strategy/