It's called a fast market trading condition. Generally when the SP starts moving around very quickly, the quotes just simply can't keep up, so they widen them. Unless it's right after a fed announcement or something, there is no way in hell any MM is going to be able to make a market 5.4-7.8, the broker would rip their head off. Now, for an in the money option a market may be quoted 24-26 or something like that, but even combos are only quoted 2 bucks wide these days. The problem is that everyone wants to just trade this and the OEX electronically and for that luxury your going to deal with a much larger spread. If however you go thru a broker, you'll find that the bid/ask is probably half that of what you see on the screen -- plus you actually have a chance of getting filled .20 on either side of a $1 wide market (although you may have to wait a minute until the market moves against you if you try to go in between the bid or offer. I know it's really easy for everyone to complain about wide spreads and say how great things are other places, but there is a very good reason that the MMs have to have large spreads. It's cuz people try to take advantage of them anytime and anyway they can (remember the SOES bandits). Or once the CBOE started to guarantee certain quantities at the bid or ask, what happened ? Well I'll tell you what happened, you had some a-hole from New York (most of the time, althought their are a-holes everywhere ) put in a one-lot sell order a dime above the bid in the equities, say IBM for example. Let's pretend the market on the screen was 2.00-2.50 (back in the day). This guy would offer 1 lot at 2.10, have his quoted displayed, and then electronically put in an order to buy 200 at 2.10, and essentially get filled .10 above the MMs bid. Tricks like that made/make it very difficult to maintain the tight markets everyone wants, without breaking the MMs that do provide the liquidity that people say ain't there. Trust me, the MMs could care less about selling a 20 lot in between the bid/ask, they'll do that to keep the brokers happy, but they go too tight, and the market starts to move and Morgan Stanley comes in and wants to buy 5000, then there's trouble. Sorry to go off on a rant, but it kills me everyone loves to pick on the MMs for making wide markets (which they have to so their not constantly getting picked off), and when they make a wide market you all bitch cuz you can't pick them off. This isn't even taking into account all the things Morgan and Goldman do to f*ck the MMs, getting picked off for .50 on a 20 lot don't matter to them, losing 1.50 on 100 is a completely different ballgame Vega Ex-SPX MM One final note -- Everyone that trades does so because they feel they have some kind of edge that others obviously don't. For the MMs they trade off of order flow and bid/ask -- this is their edge, and for this edge they will make a two-sided market. You may trade based on technicals or market news moving the market (contrary to popular belief you probably have more access to market news that those on the floor -- they find out about the news generally when Solly comes in to buy 5000 puts:eek: ) You have to decide how your trying to trade. If you're trading straight vol, you're not going to be able to day-trade vol and beat the MMs (unless your riskarb, lol), if you're taking a longer term position, then you have a chance, but if you're trading delta then pay up or hit the bid you cheap bastards Just kidding, but consider synthetically what price is would be to get long or short an equivalent amount of underlying, and if it's cheaper with options do it, if not -- just trade the underlying outright. If you don't have the funds to get long/short the same amount of deltas in the underlying -- well then you're paying up for the right to over-extend your trading.
Vega, Thanks, I always appreciate your insights. If you have a chance, check it out now. All of the near the moneys above 5$ are trading the with the 240$ b/o spread and the market is barely moving.
WOWOW !!!!!!! Those quotes are ridiculous. I may have to consider going back down to the floor !!!!!!!!!! Granted I haven't traded the SPX in a while, but I'm sure that (as I said before) if you use an actual live broker you will get a much tighter market. I know, you should be able to get a tight screen market, but it ain't gonna happen anytime soon. Although electonic may be the wave of the future, if you want to trade this product you're gonna have to do it the old fashioned way, get on the phone and execute your trade. Vega
Very well said! Thank you, Vega. I've always thought that the spread on options have been fair. I remembered paying over a point on spread on cree options back in the good ole days of 2000. I would make 10 or 20 points in a few days, and a couple of points on the entries and exits were ok. Cost of doing business (or gambling as was in my case). Now, the spreads are much better on the equity options, so for someone like me who only trades directional, it's great. But still, I don't mind paying up to hit the ask, because I try to make it up by making sure that I focus and wait for a good entry point and not be too eager to get into a position. I do try to put it in between the bid and ask and there are times when they give it to me...
A spread of 2.4 is not a bad edge at all. Combine that with record volume in the spx, and the spx pit may not be a bad place to be.... Actually my point in this thread was not to begrudge the MMs their spread edge. Its the same edge I depend on minus all the obligations they are saddled with. My trading partners are rarely the auto quoting MMs as my trades are too short to dig out of the spread hole I would be in trading with them. What this does to me is throw off my r/r as I am no longer confident in working the dynamics of a gulf this wide. I left a message with a lawyer there in an attempt to understand how the spread can be larger than 200 and whether this will be a new fixture. I'll post an update when I hear back.
Vega, One question about your example. If the ahole above put in his 1 lot offer .1 above the MM bid and then went to buy 200 at the same price, would the size available not be only 1 resulting in market of 199 at 2.1 x MM size at 2.5? How would the MMs get trapped in such a scenario. Are they not free to pick off a one lot without lowering the entire auto-quote or, alternately ignore the 1 lot entirely?
Not sure if it still works the same way, but when I left the exchange was leaning really hard on the MMs to guarantee the markets on the screen. I think when I left that meant in the equities that everything posted was good for 200 up (may be 500 now). So if the MMs didn't take out the one lot, they could end up selling much more than one lot at a horrible price. So I believe the final answer to your question is YES they would have to sell .10 above their bid. The result of that is that because they didn't want to sell say 50 .10 above their bid, someone would generally take out the one-lot. Hope this helps, Vega
I'm not sure if thats still the case in equities- thats one hell of an anti-edge. In spx its definitely not the case at present.
The SPX and OEX are different beasts. For whatever reason (probably cuz they're exclusive to the CBOE) there are different rules that apply to them. Glad to help, Vega