RAES (option) Bandit
I met a Dem-donor and HFer at a Gore rally in '99 and ran a sub-account for the donor until 2001. There was a prominent tail-hedger who also ran an account there who lost 12% over the same period. The founder of the fund was keen on posting all sub-account results in a monthly email.
I left and funded my IBKR account with my perf-fee, taxable account and liquidated my self-directed IRA. I wanted to be free to short the dotcom/telecom bubble. I met my wife during this transition and she made me aware of the telecom dereg act and she personally held 120K shares of ALGX and she was restricted at the time so we wrote collars on the shares.
I had size-wins in short telecom that did well against named like LVLT and other tickers in the CLEC-space; partially as a L/S hedge against my GF's ALGX position. I bought back my shorts early when I discovered the COMS/PALM arbitrage trade and the crossed quotes in the former.
The dual-listings in SN equity vol were not linked by the OCC. You would often see the same listing with calls bidding at 3.25 on PHLX and offered at 3.00 on say, PSE. You could lift the offer at PSE at 3 for 20 and hit the bid at PHLX for 3.25 x 20. I say 20 because under RAES retail was prioritized up to 20 lots. The above was the actual market in the front contract in COMS ATM options.
The "RAES arb" was amazing. My first trade was the above 20-lot. I had been picking off stale quotes and exploiting RAES for months and this just happened to fall into my lap. I was filling these manually; always buying to open at the limit and STC at the mkt, routed to the crossed market exchange. I scratched less than 3% of all transactions.
This went on for months, mostly in COMS but in other tickers as well. Any high volume large cap saw various levels of crossed market arb.
You had to keep it to 20-lots or less to receive the instant, marketable fill. I made 1.4 in the first month on 20-lot orders. I developed carpal tunnel and was on Naprosyn for the pain. I hired a local programmer to automate through their API and literally the day we were to go live the arb was dead.
That morning I had a 15 cent arb in some ticker and the buy filled but the STC hanged. Attempted to cancel but it hanged as well. Price on the target exchange dropped in line with the other listings. No longer exhibiting the hang but I was no longer marketable.
Any crossed mkt would hang. I would find that OCC finally became aware of the x-market arb and was freezing any crossed quote seen on SN-vol across all exchanges. The arb was dead.
I move on in SN vol preparing for the CLEC crash (as I saw it) and a month later my doorman called me to the lobby to let me know that two attorneys had been at the front desk asking to ring my unit. He told them I was on vacation but gave me their card. I had planned on calling them on Monday, but received a C&D letter from the OCC on Saturday.
Found out that the attorney's represented IBKR and wanted to discuss the OCC letter. OCC was also asking for disgorgement of gains involved in the RAES arb.
I never heard from the OCC again... no summons, nothing. I am loyal to IBKR and how they handled the situation although I no longer can stomach their front-end and margin rules under PM.
https://www.interactivebrokers.com/en/accounts/legalDocuments/raes.php
