I was not trading in the 90's and I was curious to know what is was like trading options. Were the most liquid names comparable to trading the least liquid names today? Was it easy to find "cheap" convexity/were premiums unjustified? What were some of the top strategies?
My colleagues spoke of those being the days. Wide spreads, limited market access, and limited computing power gave market makers and banks an edge. The ISE changed that. Then came computing power to the masses and portfolio margin for 100k retail pikers. One bonus day (shortly before my time), the entire desk went to buy Porsches. It’s a different world now and one would argue that the structural edge is gone and you are just left with risk premium.
There was a time where there were no coordination bet the exchanges so option A might be .50 bid at CBOE and .45 offered at PCoast.. you can arb it.. I think it was called RAES bandits? A friend hooked up w some outfit off-shore where all he has to do is hit the buy or sell button to lock the arb because the exchanges had rules against auto trading it? strange. I think that lasted 1-2 years?and then lawsuits followed w exchange wanting clawback?
People kept comparing the blow-up of James Cordier's optionsellers.com with the busting of sellers of naked index puts on Black Monday of stock market crash in 1987 on Oct. 19, so I got curious and I found this article that talked about the plight of those put sellers. When this guy sold puts, he was able to pocket on average $300 EACH contract and those were OTM puts and then on the Oct. 19, the day of the crash, before 11:30 AM, he called the broker to offer to pay $5400 to buy back his options and no one would take his bid, and by the end of the day those puts were selling for $11,800 per contract!!! ONE contract selling for $11,800!! And this was in 1987!! That is some "structural edge!!" https://www.washingtonpost.com/arch...f02-9d22-585cf53c8548/?utm_term=.2d2c87c04e0f
Neww I am surprised at the comment "one would argue you are just left with risk premium." You are an active investor! I was thinking, maybe 20 years from now, people will be looking at us saying those were the days when....
LOL. Those retail pikers (ie competition) changed the market for the better. The market makers (and I was apart of the floor community) were crooks. ISE/RAES/PSE made the market makers honor their quotes (imagine that?). For these crooks it has always been about "not allowing customers to trade with each other". So for a few years the market was actually fair for all. Today they have created a similar marketplace (not allowing customer to customer trades) via technology and rules that create a two tiered marketplace. The beneficiaries of these rules are the preferred customers (HFT's/MM's) that we all know about which is limited to a handful of firms. As Buffett says, "it is easier and safer to steal money with a pen than it is with a gun" Having said this - during those times (late 90's/early 00's) it was easy to make money but I actually find it just as easy making money today (mostly trading against the machines). Today no one is rewarded for posting markets (because of the rules) so spreads are wider. The arbs listed above (ie crossed markets) are still present (they are just hidden from the NBBO). #1 rule for me: Never over estimate the intelligence of others
My good friend (an engineer) who was an option retail at that time said trading options was quite profitable - if you understood arbitrage, options pricing and knew how to compute option prices. Much harder now with internet and when everyone has the tools.
Yeah some great times back then you had RAES and the. The SOES advantage as well. It was like running a factory lolol.
So they weren't even honoring their quotes??!! What like those forex brokers, requoting and "last look's"? So if you post a limit order with non-NBBO price to a specific exchange, you might get filled if it's matched by the hidden quotes?
The evolution in electronic markets begins in the '90s. CBOE, AMEX, and PCoast are the big markets. OEX has pretty much died and has been replaced by the SPX. CBOE works a deal to merge with the PCoast which never ends up getting done. Big celebration party and then the deal is off the next AM. Lot's of small market makers still around and they are looking to sell their names or consolidate. NYSE options and the CBOE consolidate and the NYSE option floor closes and becomes the Greenroom at CBOE. ISE and payment aren't a factor until after 2000 so volumes are still modest and commissions are still expensive. No hidden liquidity on the exchanges until later in the 2000s. A couple of handfuls of liquid names, but more based on multiple listing competition. Trade thru rules exist, but no linkage yet. Overall volumes are modest and costs are still pretty high to execute for most of the '90s so volumes are around a couple million a day. Exchanges still are charging fees on everything including the automated systems. The big sea change in trading begins when the ISE lights up in 2000. Payment runs as high as $.80 a contract. Everything goes multiple list with the exception the monopoly products and the major ETFs. ETFs still have exchange fees, but that goes away in the 2000s and payment becomes common for ETFs. In the 2000s after ISE opens we get the linkage of exchanges. Payments take many forms and the maker/taker model evolves as well. New MM firms come to life because they can acquire trading names cheaply. Citadel is a clear example of the new breed of electronic MM. COB comes in the 2000s as well as "so-called" Smart Routes". Technology costs get so high the small MM firms either consolidate, sell out or die. Many of the original ISE members don't survive in their original form, but the early 2000s were a heyday period of trading. MMs often had quotes posted below fair value just to print the volume. Also in the 2000s, you get MIAX and NASDAQ into the business and the beginning of the thought process for the formation of exchange groups. Today three MMs are probably half the liquidity provided and as much as 15 - 20% of the customer volume. If still have CBOE/PCoast merger shirt - the Ying/Yang shirts - don't use them to wash the car - they still trade pretty rich. I'll dig one up and post pictures