Question
I actively trade options and as you know, it CAN be very manual work. I am wondering if you know any good execution houses who essentially act as remote Market Makers. For example, if a given option is trading at $2 – $2.20 and is at the money (with a 50% delta) I would put out a $2.05 bid. If the stock drops by 30 cents, suddenly my 2.05 bid would become the offer. My question is this, is there a firm out there that can dynamically move my bid or offer based on the movement in the stock. I have been doing this manually, and it is a ton of work, it would make me much more efficient if I could find a way to automate this. I do hear of some funds becoming remote Market Makers, not sure how feasible this option is any feedback is appreciated
Answer
I could write a book on this because I’ve traded against Market Maker auto quote systems for 3 years using s VERY complex proprietary system. The technology is out there to auto adjust based on the stock, however, the option exchanges protect their members (Market Makers). They don’t want you making markets off floor for free when their members are paying for that right. You would also have priority over the Market Makers since your order would be considered “retail” vs. “firm”. The members would never stand for that. The way the exchanges discourage this is to police the cancel/fill ratio for all brokerage firms. The cancel rate has to be within established guidelines. For instance, if a firm handles 1000 option orders a day, they might be allowed 200 cancels. As soon as the firm exceeds this limit, the exchange charges them per cancel. If the firm were charged they would identify who is generating all of the cancels. Then they would either pass the fees through or ask you to move the account. Given this info, there aren’t any firms that offer what you seek. They also don’t want the liability of having quote issues, delays and miss-fires. Also, what option pricing model would they use? The “greeks” are dynamic and the delta changes. Market Maker firms have spent hundreds of millions of dollars programming what you seek. The process is labor intensive and they don’t want to pay a guy to stand on the floor.
As for putting the order into the “trusting” hands of a Market Maker firm that promises penny fills – hah. Money corrupts – trust no one. Everyone is looking for an upper hand and Market Makers NEVER GIVE UP AN EDGE. If they feel they can fill you within the wide guidelines of “fair practice”, they will give you the worst fill they can within that parameter. That’s their job. I’m sorry I don’t have better news, but that is the way it works.
You obviously know the advantages of “working an order”. When the crowd senses a “sitting duck” order, they will lean on it as long as they can. It is always best to cancel and replace when possible.
