I want to close a short option position for a contract that has no bid and an ask of .15 so I put in a bid of .05 on 5 contracts and all of a sudden there are offers for 300 contracts at .05 -- this has happened to me many times ( the sudden appearance of offers where there was none after I make an offer) with many different contracts on different equities. What is going on here?
This is not abnormal. There are designated market makers who are obliged to be at the best bid/ask some % of the time. If there are no bids, i assume they have no obligation (not sure). Secondly, even non-obligated MMs will watch the markets for good deals, but they won't always post orders for various reasons such as possibility of tieing up capital in less liquid contracts or to not give away their intentions, plus a variety of other reasons, it all depends. When you post a bid that is new information for them and they will act on it (new information about open intrest). If you mean that those bids stayed there after you got filled then it's possible it was an obligated MM that might need to keep those bids there so you screwed a little with their models maybe. And when i say "watch the markets" that means they have computers that do that based on their pricing models, not real humans, like the poster before me suggested.
I am not behind the scenes but I think that "they" are unlikely to tell you the truth. I have read about HFT moving off the commodities and stock/bond markets to options just in the past 18 months or so. There has been a qualitative difference in my view based on my years of experience. It is clear to me that something has changed, but strangely enough, due to the restricted liquidity in options, they can't use all of their tricks. I have captured many odd charting things in the past year in word documents to think more about it and my response. To expose their tricks, move your quotes at random times and look at the response in the quotes using the mathematics of options. Then use the knowledge gained to beat them at their own game. They claim to add liquidity, but they really need to take it for most tricks while forcing you to pay the fees for taking it. Hope that helps.
i'm sure its just a squeezing effect.. your just fishing trying to figure out order flow and squeezing it when you find it.. doesn't that make sense? its the same thing a floor options trader would do..