I notice this behavior all the time, so assume it's well-known and I just want to understand what I'm seeing / what's happening. Consider an option with a fair value of $0.60 whose current spread is showing as: 240 x $0.50 / 325 x $0.90 Now suppose I put in a bid of 10 x $0.55 (and no one else joins me at that price) such that the spread is then 10 x $0.55 / 325 x $0.90 I've noticed that if I then cancel my Bid, the following happens: The ask will dip down to 10 x $0.85 (so spread, for a few moments, is 240 x $0.50 / 10 x $0.85) The ask size will then increase to a few hundred but stay at $0.85 (e.g. 240 x $0.50 / 325 x $0.85) I can then repeat that sequence (submit 10 x $0.55, then cancel it), and it'll "pull" the Ask down to $0.80, then repeat it and the Ask will drop to $0.75, etc. Now there IS a limit to how far I can pull the Ask downward like that -- e.g. in the example above for an option with a $0.60 fair value, I usually wouldn't be able to tease the Ask down below ~$0.70. I'm guessing this is just part of the market maker algorithm, but it's so reliably repeatable I'm just wondering whether it's well-known / what it's called.
A MM hoping you are going to lift your limit and they are trying to offer that the best price. No One likes to show their best markets in options with no paper and wide spreads.
Makes sense, thanks. So you're saying that, in the example I gave for instance, the MM is just trying to be at the 'front of the queue' of $0.80 bids, in the hopes I ultimately decide to come up to that price level? I should mention also that as best I can tell, there's no actual transactional advantage I can make of this situation...in that from some trial and error, I've found that the price I'm able to pull a MM's visible bid down to will still be there as a hidden Limit Sell price by that MM even when it's not displaying as the best Offer. E.g. in the example above, if I could pull the spread Bid down to: 240 x $0.50 / 10 x $0.70, then even when the spread had initially been showing as 240 x $0.50 / 325 x $0.90, I could have put in a Buy at $0.70 and it would have gotten filled. So I suppose that that 'teasing' process has still served as an an effective way to figure out what a MM's best price would be even when the initial spread looks wide.
theres a certain price level where a mm has edge. thats the price you're getting. its no bargain 99% of the time
In my opinion, not a fair comment. The MM is entitled to an edge where you get to choose what you want to do but there are no public orders. Your job is to quickly find liquidity at a price that works for you.
Yes, I didn't suggest it was a bargain of any kind -- hence my 2nd post where I say that I don't think teasing actually results in a better price than could be achieved without it...rather, all it seems to do is expose / give hints as to what a MM's 'best price' actually is. Yeah, that was my assumption as well...that they just want to be at the front of the queue at that price level, either (a) when a buyer comes up to that level, or (b) if someone hastily- or unwisely submits a market order. (Though I have wondered in that latter case of a market order whether it would fill (using my #'s above) at the $0.90 displayed 'best Offer', or whether it might instead get filled at the MM's $0.70 best-but-not-displayed Offer, but I don't know the parameters of what order types they are using, and I don't place market orders, so I prob won't find out.)