Hand signals?

L

Lobster

I was just wondering. If I wanted to trade stock options on the floor as a market maker, how would that work in the real world? Is it all done using hand signals? How do you advertise your price levels in a trading pit? Is there a distinction between the price maker and the price taker and if so, what are the implications? Also, how are disputes resolved, like if I say it was a trade, and the other party denies it.

From your personal experience, how long does it take to learn and get accustomed to hand signals and stuff?
 
Originally posted by Lobster
I was just wondering. If I wanted to trade stock options on the floor as a market maker, how would that work in the real world? Is it all done using hand signals? How do you advertise your price levels in a trading pit? Is there a distinction between the price maker and the price taker and if so, what are the implications? Also, how are disputes resolved, like if I say it was a trade, and the other party denies it.

From your personal experience, how long does it take to learn and get accustomed to hand signals and stuff?
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Lobster in most pits nobody uses hand signals. You don't need to. They tend to be small. The way it works, you stand in a pit with maybe 15 guys. Broker wants in and asks for a market in stock XYZ. He will never tell you if he is a buyer or seller. Always assume he wants the market on the calls. If he wants the puts he will say puts. Now you have to give him a two-sided market since you don't know if he wants to buy the calls or sell the calls. Whoever wants a piece of that order will yell out out their bids and offers. If he wants to buy the calls he will say sold to the MM with the lowest offer and vice versa. If the broker is not happy with the offers he walks away. Or he could put his order on the book and leave.

Trading disputes are known as out trades. Every morning the exchange will provide you with all your out trades from the previous day. These are trades that did not match with the other side. These have to be resolved before the open or you have to eat it. There are guys on the floor that you go to for this. Most of the time these deals are worked out. MM are very honorable on the floor. If they make a mistake they will eat it.

A word of note. It is very very hard to break into a pit. Most guys will treat you like a piece of shit for 12 months before they accept you. They will move markets against you, they will take your order flow, they will scream and curse at you. I'm dead serious. Call it hazing if you want but these guys never like to see a new face in their pit. Think about it, when you show up, that means less order flow for them and tighter spreads. Its not as bad in the bigger pits like IBM. But just so you know, it won't be an easy road. Good luck.
 
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