Program Traders versus NYSE Specialists

Discussion in 'Strategy Building' started by bungrider, Jan 27, 2003.

  1. One thing I'm curious about (and maybe Tharp or def can answer this) is whether NYSE specialist firms can program trade. In the past (and I don't have a current rulebook so I don't know if this is still true), it was the rule that unlike options market makers, NYSE specialists were not permitted to use other instruments (derivatives - options/futures etc) to hedge their account positions. This contrasted sharply with an options market maker at the CBOE, who is permitted to trade any instrument over any exchange or OTC to hedge his options risk.

    But let's say a specialist works for one of the bigger firms, like SLK. This specialist is in some serious trouble in either a skyrocketing or tanking BIG-cap stock, say ENE for example. I'd find it hard to believe that if a big firm like SLK is the specialist firm for ENE, they wouldn't hedge their exposure for this position somewhere else, even though NYSE rules specifically say that the specialist cannot hedge (buying puts for example) to limit his risk.

    It makes sense that an NYSE specialist can't hedge with options - essentially what would be happening is that he'd be f^cking the options market maker in his stock every time, since he obviously knows more about what's going on in the stock than the options MM does, so what would the motivation be for the MM to take a position opposite the specialist? He wouldn't.

    But I find it hard to believe that a large firm like SLK never blurs the lines in the above worst-case scenario. Say large mutual funds are throwing ENE shares at both SLK and the ENE specialist, and SLK is hedging this exposure by selling S&P futures, even though they aren't allowed to hedge the exposure coming from the shares that their specialist is forced to buy. Does SLK simply get f^cked by the shares of ENE their specialist is forced to buy? Or do they have another way of hedging this exposure (besides their normal degree of milking the order flow).
     
    #11     Feb 25, 2003
  2. Index arbs can short on a downtick.
     
    #12     Feb 25, 2003
  3. Seven months later, I've run across this again, and now I know what the answer is - the specialist gets short the stock and doesn't buy any.
     
    #13     Sep 29, 2003