Say bid ask for BABA call is 3.35 vs 3.45 I can get filled by posting a better ask at 3.44, however my order does not show up in the consolidated best bid and asks. Is there some rule that causes non 5 cent bids and asks to not show up?
That's not price improvement. That's a dickheaded offer, stepping inside of someones market by a freakin penny. Bad form. Terrible etiquette.
Some stock options are allowed to trade in penny increments under 3 (called the penny pilot program). Those in this program still require .05 increments over 3. There are a few exceptions to the over 3 rule, such as SPY. BABA does allow penny increments under 3, the problem is the call you mentioned is over 3, hence the exchange won't allow you to post a bid or offer. Note that spreads can trade in penny increments. The challenge you face if you are doing this in an under 3 option is you may be joined if it is still a good buy/sell or if your not joined the trade will just take place on another exchange. So for example if a BABA call is 2.25 - 2.45 and you put a 2.44 offer in and are not joined, but its still a good sale. Your order may have been sent to the PHLX. I put an order in to buy at 2.44. If my order is routed to any other exchange, it will be filled there (and not with you) unless the MM's decide it's not a good sale and re-route it to the PHLX.
Awww... you ruined it for me. ...but now I have to ask. @traider, how many lots did you have on this offer@3.44? Please tell me what size an 'experienced' trader throws around.
Sorry, I'm not following what you mean by "joined?" Do you mean the MM decides not to lower/raise his price to match yours? If so, if MM does join you, it will become a protected quote which has better change of being hit?
Most MM's will "join" your bid/offer if you improve on theirs. So if the market is 2.25 x 2.45 200 up, and you offer at 2.44 for a 1 lot, suddenly the new market is 2.25 x 2.44 , 200x 201. With multiple exchanges those offers could be the aggregate size on all the exchanges, so you would not be first in line if the order traded on any exchange other where your offer is listed. Basically they are stopping you from stepping in front of them.
Back in the day where MM's all traded together in one pit, cutting someone's market by a tick could get you punched in the face. Definitely didn't go over well. But today I don't necessarily agree. We are now living in an age of HFT buying order flow in stock and literally trading .0001 below a current offer. In the option market almost all markets are generated by a computer. Beating a current market will generally cause the market to tighten as the computers join you and the competition will cause tighter markets, which is good for the customer. Also in certain single listed products, such as the SPXW, being first to change the market as a customer will give you priority (although no penny quotes here). I guess I see a difference in trying to beat the computer program with a penny improvement, but can still see your point.
If he thinks improving quote by a penny is bad behavior he should try it for himself. Improve the market makers quote by 1 penny and see how much adverse selection you get. It's futile to talk to people without hft experience. They just don't get it and will waste time arguing about all sorts of useless things