Front running option trade?

[You]

I didn't see this in real time, but only found this when reviewing my screen recorder and looking at the milli-seconds.

Full disclosure, I found this while reviewing the Lightspeed Demo.


Last Friday, 8/20/21, monthly options expiration day.

I saw lots of suspicious activity, but will only share one in this thread.

I've suspected option front-running, but what I saw, looked like an extreme example of it.

This happened at 15:53 NYC time.
(Time stamp is from my screen recorder that sees milliseconds. Lightspeed doesn't show milliseconds.)

These three screenshots happened in about 20 milliseconds.

444 PUT is 1xITM 445 PUT is 2xITM
Below is timestamp, 0.43 seconds (43milliseconds)


0.53 seconds (53 milliseconds)


1.00 seconds (100 milliseconds)


-----------------------------------------------------------------------------------------

Time and Sales is showing a 200 contract execution at the 53millisecond time stamp, for 0.59. There is enough liquidity here to fill a 200 order all the way down MPRL @ 1.48.
To reach .59, I totaled 673 contracts need to be transacted 1st.


However, it seems >50% of all Bids disappeared when the order showed up to fill them at .59, instead of 1.51, 1.49, and 1.48
I want to repeat, there's only 20 milliseconds between all 3 images.
20 milliseconds!


Oddly, the L2 didn't reflect the book change until 10 milliseconds later.
Perhaps that's just a demo thing?
Perhaps that's just lag with Lightspeeds data provider?
Just ignoring that lag, doesn't this look highly suspicious?

This looks like illegal front running to me.
I seems the person entered a Market order to either exit a trade or open a short and suddenly the market disappeared and they filled at 61% worse price.

 

[BKR88]

I have multiple screenshots of limit orders placed right on the bid/ask and the orders don't fill.
I think @destriero has placed orders only to see the bid/ask move away from his orders. (If I remember correctly )
IMO, the bid/ask on the screen is from market makers trying to show a tight spread but they're not always willing to fill there.
Problem is not with the broker. It's the market makers as I placed the same order on 2 brokers and got the same result.

 

[Robert Morse]

Hi You, with no knowledge of this trade, and no desire to look into it, I'll give you my 2 cents. The options are traded on 16 option exchanges by multiple market makers and with customer limit order. The real size of these options is much bigger than displayed. I notion that a 200 lot would be something that would cause your concern is very low.

 

[You]

I've suspected something fishy going on.
I've never really had solid data to confirm it. The underlining moving? Another order coming in that sweeped all the market makers?

Finally, I captured it with Time & Sales, a Deep Level 2, and with video that I slowed down to the milli-seconds.

There are explicate, clearly written rules for market makers on when they are allowed, and not allowed to pull a quote.

This reminds me of the server co-locating HFT front running from years ago.
Where Server A is closer to the source of the order.
Server A sees the order, has a faster pipe to the exchange than the route the order is going.
Server A then pulls it's quote micro seconds before the order hits the exchange, legally allowing it to pull it's order before the order arrives.

in my example,
ISEX disappeared
NSDQ disappeared
ARCA disappeared
BATS disappeared
MPRL disappeared
CBOE disappeared
EDGE disappeared
PHLX disappeared
and who ever "T" is, they caught the order

This isn't just one exchange disappearing.
This is several...
Again, this whole sequence of 3 images, was in 20 milliseconds.

My screen recorder can only do 30frames/second. I can only grab 30 images inside of a second.
Unfortunately, it's not advanced enough for me to slowly step through each of those 30 images inside of a second. I wish I could see this every 1 millisecond or less.

 

[horizon]

Can you do a test with a stock that not many people trade to see if that happens? Also, why do you think it is illegal front run?

 

[You]

Hi You, with no knowledge of this trade, and no desire to look into it, I'll give you my 2 cents. The options are traded on 16 option exchanges by multiple market makers and with customer limit order. The real size of these options is much bigger than displayed. I notion that a 200 lot would be something that would cause your concern is very low.

When you say 200 lot, do you mean 200 contracts?
Unlike stocks, my understanding is that the size in L2 is displayed per contract, vs something a display of 10, actually meaning 1000 or 10,000 option contracts offered by the market maker.

As well, I know that "200" in time and sales, is 200 contracts. Not short for 2,000 contracts or 20,000 contracts.

I'm not sure I understand.
This was NOT a trade of mine, but just something I observed.

 

[Robert Morse]

Option on LS Trader are not 1/100 like stocks. 200 option or a 200 lot is 200. In SPY, 200 is a very small trade for a just OTM put or call. Very small.

When you say 200 lot, do you mean 200 contracts?
Unlike stocks, my understanding is that the size in L2 is displayed per contract, vs something a display of 10, actually meaning 1000 or 10,000 option contracts offered by the market maker.

As well, I know that "200" in time and sales, is 200 contracts. Not short for 2,000 contracts or 20,000 contracts.

I'm not sure I understand.
This was NOT a trade of mine, but just something I observed.

 

[You]

Option on LS Trader are not 1/100 like stocks. 200 option or a 200 lot is 200. In SPY, 200 is a very small trade for a just OTM put or call. Very small.

I agree. It's very small.
It seems odd for a Market Maker to avoid such a small trade.

This strike was 2x ITM vs OTM.. Liquidity is always less ITM vs OTM, but you can see that there was plenty of liquidity within 2 cents of the bid.
Even within 60 cents of the bid.
But it's filled almost 90 cents from the bid.

While typing an earlier response, it gave me the idea how to step through the video in milliseconds. I found a 3 milli-second window where L2 showed 1.51 at the BID, and then 3 milliseconds later, 0.60 for the best BID.

The shortest step of the screen recorder is 3 milliseconds.

 

[You]

I figured out how to step the screen recording software, frame by frame, in it's tightest sample rate.

I was mistaken earlier to assume the milliseconds stops at 60.
In this software it runs to 100, before counting as 1 second.

Below I found a 3 millisecond window when the L2 changed dramatically from 1.51 to 0.60 on the BID.





Again, this was 8/20/2021 @ 15:53 (approximately 15:53:12)

Using Think or Swim, ThinkBack, I found the same reaction there for SPY AUG 20th expiration, 445 PUT (which was 2xITM)

Robert, this isn't an attack on Lightspeed.
(sure, I'm seeing a lag in the Level 2 for options, behind the Time and Sales, (I measured 22 milliseconds with an error of 3millisecond sample rate) but I know this is a demo.)


The major issue here, is why did the BID drop off by almost 90 cents, in 3 milliseconds, to fill a 200 contract order? and then the BID return back.

 

[You]

Can you do a test with a stock that not many people trade to see if that happens? Also, why do you think it is illegal front run?

I'm not trying for a stock. It took me many many hours just to document and find this.

Why is it illegal?
I should rephrase my comment after giving it thought.
I know there are many specific FINRA rules for STOCKS, on when Market Makers are allowed to withdraw their quotes and not allowed.

I don't know what the rules are for options.

For stocks, there are clear FINRA rules, that if a Market Maker is displaying a quote and an order comes in to execute on their displayed quote, they are required to fill that order.

There is an exception where they are allowed to not fill it if they are already in the process of replacing the quote with a different quote, and that quote just hasn't hit the book yet.

There are several other exceptions like maybe you are having computer problems, you get a "get out of jail" card and can avoid getting slapped.

Some of these exceptions, FINRA puts a qty limit per xx days, that they can say "Nah, I won't fill that order", but after that FINRA will smack them.

Again, these are rules I know for stocks. I don't know if they apply for options.

As well, I am showing a 90 cent drop on the BID,
in 3 milli-seconds or less,
only an extreme move on just this strike
w/o movement in the underlining to justify it.
(over ~50 milliseconds, SPY moved from 443.4102 to 443.415. A half penny move.)
It looks like quotes from 7 different exchange routes, disappeared in 3 milli-seconds.


To me, this is HIGHLY SUSPICIOUS that Market Makers for ISEX, NSDQ, ARCA, BATS, MPRL, CBOE, EDGE, and PHLX did NOT live up to their FINRA obligations as Market Makers.
My only big question is, do the same obligation rules for stocks, apply for options?
Or are Market Maker obligations to fill orders on their quotes, more relaxed?