automated market making options/futures

[gmst]

So, I would like to make markets automatically on some options/futures.

I am going to do following:

1) Get a dedicated server in a co-location facility.
2) Write an algorithm to put bid-offers in the markets improving current best bid-best ask. I will use C or maybe old VB to accomplish this.

My questions are:

1) How will my actions change the order book? So, if spread is X and I improve best bid and best ask and narrow the spread to 'X-deltaX', how will other MMs respond?
2) Before going live, how do I test? What kind of testing infrastructure do I need in place?
3) Is there a good order execution simulator to backtest these strategies. Or will I have to write everything custom?

I know this is a substantial task, but I would like to get a go at this. Worst case would be I fail. My programming skills are average and any advices/criticisms are welcome.

 

[FSU]

If you are doing this as a customer, instead of as a marketmaker, you will only be able to put either a bid or offer, not both, for equity options.

If you are talking about just improving the bid/offer without regard for value, the market makers most likely will join your bid/offer if it is under value.

 

[just21]

The algos are getting faster. I trade option on futures manually. Before you could be the best bid/ask and it would take a nano second for the size of bid/ask to increase as the competition matched your price. Now it is instant and in some markets they beat your bid/ask without you ever seeing it display. Put some bid/ask in a wide otm market and see for yourself.

 

[1245]

Quote from FSU:

If you are doing this as a customer, instead of as a marketmaker, you will only be able to put either a bid or offer, not both, for equity options.

If you are talking about just improving the bid/offer without regard for value, the market makers most likely will join your bid/offer if it is under value.

As Pro-Customer you can bid/offer-about $0.20 extra per contract at some exchanges. At some exchanges you can make two sided markets as "customer", however if you enter 390/day on average over a quarter, you have to claim pro-customer. If you are running any MM automated system, you can reach 390 orders by 9:35am.

 

[gmst]

Quote from FSU:

If you are doing this as a customer, instead of as a marketmaker, you will only be able to put either a bid or offer, not both, for equity options.

If you are talking about just improving the bid/offer without regard for value, the market makers most likely will join your bid/offer if it is under value.

hmm...Even if other MMs join my bid-offer, my orders will get first priority at that level, isn't it?

What does it take to become an options market maker? I know about CME and exchange membership and leases and all, but am not much familiar with options exchanges and being a market maker there.

 

[gmst]

Quote from 1245:

As Pro-Customer you can bid/offer-about $0.20 extra per contract at some exchanges.

What do you mean by above $0.20 extra. It will be helpful if you can give an example.

Also, What is a pro-customer? What are the requirements to become a pro-customer? So, it seems now that there can be customers, pro-customers and market markets - a 3 tiered system of privileges and associated costs...hmmm I need to research a bit more on regulatory side of the equation.

 

[jtrader33]

Quote from gmst:

hmm...Even if other MMs join my bid-offer, my orders will get first priority at that level, isn't it?

What does it take to become an options market maker? I know about CME and exchange membership and leases and all, but am not much familiar with options exchanges and being a market maker there.

Whole bunch of info on rules/fees at this link for MM'ing on the PHLX. I looked through it a while back and, if I'm remembering correctly, it didn't seem like a real big commitment in terms of dollars upfront/monthly but the per transaction fees were higher than I expected (making it ultimately not that interesting (for me)).

http://www.nasdaqtrader.com/Micro.aspx?id=phlxpricing

 

[mushinseeker]

I've asked this on ET and have gotten the ff. answers
1. The margins have shrunk due to decimals instead of 1/8's
2. Most of the MM have gone out of business or operate on very slim margins.

I counter with the fact that other than equity options, most min tick sizes of commodities fut/options like OJ,Coffee, Crude have not changed-which means that the margin today market making is the same as it was when floor traders made a pretty good living running a book using bid/ask as primary edge. Furthermore, there is a certain fairness in elec markets now due to FIFO rules,etc a trader that just got the "crumbs" then has a better chance of getting filled now. In the 80/90's most of the paper flowed to the big mm specially during fast mkt conditions . Since it is open outcry the bigs- Cooper Neff , CRT got most of the paper. The volume and open int as least int he softs, is still as it was in the 90's so contracts are moving back and forth, so how can there be no $ in Mkt making?

Lastly, I've tried to get in touch with some of my ex-floor trader "acquaintances" and no one would respond -either they all hate me/ all retired /all driving a cab or guarding the last edge in the trading universe. I hope it is not 1 and I think it is a combo of 2 and 4.

How wrong or naive is my sentiment?

BTW. I am strictly speaking about NYBOT/ICE and possibly NYMEX contracts due to min tick still from the "old days"

 

[Eyez]

Colo at aurora is ~$3k a month.. if your not even in the same facility as most futures mm'ers -- Expect to get picked off, over and over and over again.

If your just making software that improves market bid/ask void of any other information, expect to get picked off, a lot.

Quote from gmst:

So, I would like to make markets automatically on some options/futures.

I am going to do following:

1) Get a dedicated server in a co-location facility.
2) Write an algorithm to put bid-offers in the markets improving current best bid-best ask. I will use C or maybe old VB to accomplish this.

My questions are:

1) How will my actions change the order book? So, if spread is X and I improve best bid and best ask and narrow the spread to 'X-deltaX', how will other MMs respond?
2) Before going live, how do I test? What kind of testing infrastructure do I need in place?
3) Is there a good order execution simulator to backtest these strategies. Or will I have to write everything custom?

I know this is a substantial task, but I would like to get a go at this. Worst case would be I fail. My programming skills are average and any advices/criticisms are welcome.

 

[1245]

Quote from gmst:

What do you mean by above $0.20 extra. It will be helpful if you can give an example.

Also, What is a pro-customer? What are the requirements to become a pro-customer? So, it seems now that there can be customers, pro-customers and market markets - a 3 tiered system of privileges and associated costs...hmmm I need to research a bit more on regulatory side of the equation.

From NYSE-AMEX options:

Professional Customer
NYSE AMEX Options will be introducing a Professional Customer designation pending SEC approval. Trading firms that clear
activity where the beneficial account owner clears in the customer range and places on average over 390 orders a day across
the industry will be required to submit those orders with the Professional Customer designation. These orders will continue to
clear in the customer range at OCC but will receive broker dealer treatment.

This designation removes cancel fees and allows two sided markets as a customer and you no longer have 'customer priority." You no longer go in front of MM, you are equal. At the AMEX, as an example, the charge customer orders a fee of $0.00 and Pro-cust $0.20. You will have to look at each exchange for the fee for this. Every exchange has a different term. Some call it pro-customer, some non-priority customer, voluntary professional, etc.

If you PM me your contact information I can explain it better. You don't want this unless you are running an automated system.

1245