trade SPX spread - turn around time question

when i put on an order to trade SPX spread (whatever spread with 2 or more legs), the turn around time could be as much as one minute. Quite often, i thought i may have to increase my bid price for buy order (or decrease ask price for sell). I adjusted the price, but a few tens of seconds later the order was executed at my previous price. this does not happen with RUT spread, which orders are mostly routed to ISE.

does anybody know the mechanic behind the execution of SPX spread?? how long should i wait to see if my order got executed before adjusting the price????

 

The SPX is a single listed open outcry pit. Your spread order is manually executed so its takes time.

 

re Xflat's comments above--- (and he is right)

As a consequence, you should always wait a minute or two before you change your bid on a spread, and a bit more if you are entering a butterfly or condor. It is surprising how quickly things are done, however. I think it may depend on your broker somewhat, as well. I have had orders filled at the midpoint or even a bit better on occasion, and within 5 seconds or less at times. On the other hand, I have also seen orders that are 0.20 over the midpoint be ignored and not fill at all. The pit is a bit capricious. I resist going beyond 0.2 over as a matter of principle, and will typically wait a minute or two and then withdraw my order. I often then will change the order's strike prices slightly in one direction or the other and often I have found that it works quite well. It may be that the market maker has accumulated an order or a bit of inventory that he wishes to unload quickly. In that case, you can often get a much better deal. For the style of trading that I use, it usually doesn't matter to me all that much which exact strike price that I use. I'm usually adjusting the deltas in the direction of neutral anyway, so I can often just change the amounts of options and it will work out quite nicely unless expiry is looming.

I want to add something to this discussion in a different vein. I have traded many hundreds of SPX options over the past few years, and I have learned from experience what a reasonable price is for various options spreads, butterflies and condors. The price quotes will vary widely over the course of a single day, even when the index is not changing dramatically (like today, for instance). It pays to watch carefully and become familiar with what prices you might expect to pay in various situations. This information will save you money!!

 

Could you give us some idea how to determine a "reasonable price" for a spread, butterfly, condor, etc?? Given the wide bid/ask spread of SPX option, the natural bid/ask spread for a 3/4-legged trade can be as wide as 4 to 5 bucks. I just find it difficult to determine the price i can expect to get executed.

 

John made some good points and I’ll add a little more color too. I have traded hundreds of thousands of SPX contracts over the years and we spread our order flow to a couple different floor brokers, we also call right to the floor with our orders and we get “shows” from the floor brokers we use.
The SPX options pit is a big pit so it’s a lot more than one MM having inventory. When your order gets “quoted” in the crowd many times they’ll skew the market since the crowd knows in general which way the order flow is leaning. That’s the reason at times you’ll get filled perhaps near the bid if you’re a buyer or near the offer if you’re a seller. The market was already skewed against you. The phrase John uses “a much better deal” is subjective, you have to realize that the crowd is not going to fill you unless it’s a good deal for them. On the other hand your criteria for what makes a “good deal” is a lot different than theirs, they’re trading vs. TV you’re not. John makes a very good point in that it you need to figure out what makes you comfortable in your executions, you’re not going to get one over or beat the MM’s especially in a non electronically traded pit.

 

Adam,

Since the SPX has many strikes (a feature that I really like along with the liquidity of this market), it is pointless to try to give you what the true prices should be for various spreads since the possibilities are nearly endless.

However, I will give you a few tips for determining the true value of the spreads that I hope will help. Xflat is obviously highly experienced here and will probably be able to add a few other pointers, as well.

1) NEVER accept the natural, unless a gun is pointed directly at your head from close range! The natural is out there to capture suckers who have a lousy broker or don't know any better.

2) Find a spread that meets your criteria. Then don't buy it for a day or two. Just watch the prices. Every hour check the midpoint for the spread and write it down. Write down the index values as well because noticeable movement will definitely affect the prices, but remember that most spreads will have limited movement because both options will change in value with index movement, although not by the same amount. You'll soon see that even the midpoint will often vary substantially. Of course, your job will be easier if the price of the index stays relatively flat, but you'll soon see that the price moves along with the index, but does vary widely.

3) It is often easier to trade a vertical instead of a complex spread. Complex spreads often need to be parceled off into pieces. Market makers like verticals because of the limited risk involved. They can also capture a little on both sides. Try your order in various ways to see if you can find a more attractively priced component.

4) Realize that the market makers have an advantage. They see every order from every broker. You will not often be able to trade exactly at the midpoint, but you should offer at that point to start your order. A matching retail order may have come in. Since the major function of the market maker is to be an intermediary, the market makers love to do little swaps between retail customers taking a nickel from one and a dime from another. This transaction involves no risk for them and is an easy $150 in cash profit (minus minuscule commissions) on a 10 lot. As Xflat has stated, this market is pretty big so there is some competition between market makers to collect this easy money.

5) If your order is a decent size (say 50 SPX), it really pays to have your broker get a quote directly from the floor. This quote will usually be much tighter than the bid-ask you see on your computer screen.

6) If you are working smaller items, you can get a pretty close idea of the true market if you check SPY options instead. They are very close cousins of each other. As an example, if you want a price on a 1100-1110 call spread, you would check the 110-111 call spread on SPY and then multiply the price by 10. Frequently, the bid-ask spread on the SPY is less than two cents if the options are close to the money.

7) If you have portfolio margin, you can use SPY options to hedge SPX easily if you dislike the prices you are being quoted (just remember to avoid expiry, and deep in the money options that have no time value-they might be exercised). This is not your first choice because of commissions, but if the price is right, it may work better.

8) Major increments (ex. 1100, 1125, 1150, etc.) are typically more actively traded. If these increments fit your criteria for purchase or sale, you may have better success with them.

9) Quotes for options that are a long way away from the money (such as March 950 puts right now with the SPX at 1110, or 1250 March calls) will typically have very wide bid-ask margins. The volume in these options is much lower, and matching retail orders is much more difficult for the market makers. That means that you will have a really hard time catching an attractive price for these options. Inventory issues will be a factor since one day more retail traders may wish to be selling than buying. The market makers are required under most conditions to make a price available even if they are not excited to do so. If you are selling to open, and under no pressure to trade, you should still offer to sell at the midpoint. Why voluntarily offer to be fleeced! Getting filled may be another matter.

Other tips, Xflat??

 

John, thanks a lot for your advice. That's very helpful. I really appreciate that!!!

 

the mm's trade a lot of boxes, if you sold the 1100/1110 call sprd for $7, then the 1100/1110 put sprd is worth $3, those 2 sprds added together will always equal 10, mm's are happy to sell them at 10 1/4 and buy at 10 or 9 7/8,with the spx at 1300, the call sprd would be deep in the money priced at 200 and 190 , still 10, and the put 0, together still worth 10,watch and see where the call sprd is trading if you are pricing the put sprd and vice versa