The Other Side of the Trade

Discussion in 'Options' started by thomas3133, Jun 18, 2011.

  1. Hello,

    I have two questions related to order execution:

    1. If I submit a spread order (say, put vertical credit spread with two legs) does the order will be filled only if there is an exact opposite spread order that fits the spread limit (that is, put vertical debit spread with the same strikes)?
    Or there could be a situation in which the order will be filled even when there is no such exact opposite spread order but there are rather two single positions (not spreads) which are the opposite positions to the spread separate legs that in aggregate fit my spread limit?

    2. Does the other side of the trade must be a market-maker or can it be any party (including a retail trader)? Is there any difference between single or spread orders in this regard?

  2. rmorse

    rmorse ET Sponsor

    If your order is routed to the complex order book of an exchange:
    1-yes, someone must do the other side as a spread.
    2-the other side could be a mm or any person entering the other side. In most cases it will be an "electronic eye" looking for "value" or edge, typically a broker dealer.

    If your order is routed to a "smart route", the order maybe held on the book of a single mm, and will not be executed unless they see value.

    When I trade spreads, I want to not only send the order to a complex order book, but also choose which one. If you have a platform with direct market access, you can do that.
  3. Thanks for the answers.
    Just to clarify -- if "smart route" may only send the order to a single mm and therefore the order may not be executed unless the mm sees value, what is so "smart" about a "smart route"? According to the nature of its name "smart route" should imporove the chances of getting filled and not reduce it... If you could elaborate on the preferences of "smart route" in this regard it will be very helpful.

    Also, if I send the order to a complex order book of an exchange, don't I limit by that the chances of the order to get filled since it is available only on a specific exchange? Isn't it inferior to "smart route" in this respect?

    And just to make sure -- with respect to a spread order, I assume that whether I submit it through a complex order book or through "smart route" the order will be submitted as a spread (so that it could not be filled if there were two single opposite orders that match the spread's legs) -- please correct me if I am wrong.
  4. FSU


    RMORSE gave an excellent summary. Just to add a bit,

    Each brokerage house will have a different policy of where to send a spread based on the product. For instance, for the SPX the broker may send the order to the floor and then let the executing broker decide whether to hold the order or send it to the COB (Complex order Book). That same broker may automatically send an order for the SPX weekly's directly to the COB.

    When an order enters the COB several things can happen. As RMORSE mentioned, MM's systems are constantly watching. If their system deems there is enough edge, it will be traded immediately. If not, it will rest there and will "auto trade" if it can fill your order by buying the offer and selling the bid on your trade. Another customer or MM who sees the spread can also trade it at any time.

    The CBOE has a realtime listing of all spreads in its COB here this is active only during market hours
  5. rmorse

    rmorse ET Sponsor

    In general, a smart route supported by a broker like Interactive Brokers goes to their system, so your commissions are lower, because they don't have to pay for order flow. If you route your order to the ISE or CBOE complex order book, you will be fine. All the big traders monitor both, I have a preference for the ISE, because their fees are lower for firm traders, so trades that have smaller edge are more likely to get done there. Just my opinion, not based on fact.

    And yes, all spread orders are entered as spreads, so I believe you can't find two separate traders to fill you.
  6. You mentioned IB -- in their website it is stated that their smart routing represents each leg of a spread order independently and enters each leg at the best possible venue (

    So I understand that when I enter a spread order in a smart routing it is actually possible that I will find two separate traders to fill my orders. If I didn't understand it correctly please advise.
  7. rmorse

    rmorse ET Sponsor

    I can't talk for IB. But if their are not at least one side of the trade, how do they execute the other without risk. Then, where does the order sit when it's not executable? You'll have to ask them. I would only want my orders sitting in place where the maximum number of traders have access.
  8. You raised important points and indeed only IB may have answers. However, I understand from IB website that in smart routing they take the risk of execution problems, so it may mitigate substantially any risk of partial or double execution.
  9. rmorse

    rmorse ET Sponsor

    Can you send me a link to that. In my experience, NO electronic broker will take legging risk on any spread. No broker will of any kind. Not even a floor broker. I've been in this industry since 1980. Both on trading desks, execution desks, and wire clerk, floor broker and trading market maker.
  10. See the following link (regarding SMART guaranteed orders):

    Please let me know if I didn't understand it correctly, thanks.
    #10     Jun 19, 2011