Let's assume that a trader or a trading firm has technology/software identical to a market maker, as well as being colocated in the same spot (just to negate technical advantage). What advantages then remain for registered market makers who are paying their dues to exchanges? (I'm mostly thinking about options as they often have less liquidity than stocks and therefore I suspect more opportunities for mm's)
Option Market Makers do not require a located on HTB stocks to sell short-customers do. Option Market Makers are not required to tag bid/offers as open/close-customers must. Option Market Makers get market maker margin which is better than Portfolio Margin Option Market Makers income is 60% capital gain/40% short term Option Market Makers can change many bids/offer with a single message-non-members have to cancel/replace each order Option Market Makers are taxed based on MTM with no wash sales Enough for now.
Wow... Had no idea that my bid/offers were tagged as open/close. That's gives alot away in the less liquid market. Less leverage etc... It's like the mm knows what cards are still out in, while I am holding the cards... That would explain some of the pricing I see in less liquid markets. After I exit, the price moves again. It's like they are waiting for a person to exit before setting up the next 'trade' ... Learn something new everyday Thanks
So with so many advantages, why and how does a mm go under, or stop doing business. I remember IB stopped being a mm for options last year ...
Thanks Robert, great info. I'm only not sure how the open/close tags work when I place hidden orders? Or when I create an options combo that offsets my previous combo but doesn't close it outright? (I'm not even sure that my broker can figure this out as they split my combos into individual options when the system gets confused) Great point too.
I'll give you an example. You have no position and want to enter one order on both sides of the market. You enter: Buy 10 at 1.00 (Your broker sends buy to open (BTO)) Sell 10 at 1.05 (Your broker send sell to open (STO) First, you can't do this on the same exchange as priority customer. Exchanges do not allow this. You can do it as Professional Customer which has costs. Any customer that actively wants to make markets as customer will have to claim the Pro-Cust status for other reasons. Now you buy 2 calls at 1.00 leaves 8. The entire sell order has to be cancelled as the 2 you bought make the first 2 of 10 mis-marked on the sell side. You have to cancel to STO 10 and replace it with STC 2 and STO 8. MM do not have to do that. The OCC requires each customer order sent be properly tagged.
I would add regulatory costs, fragmentation (15 exchanges), PFOF and the percentage of option volume crossed on exchanges from off floor brokers that a electronic MM would have have access to.
Yes, there are a small number of option MM that are but most are not. Most clear at either GSEC, ABN AMRO or ML Pro.