HFT Market-Maker Idea

C

cedthetrader

Hi,

I came up with an idea for automated trading, which would require trades to be entered and exited quickly. Say I place an order to buy 1 call option(100 shares). The market maker selling me the option needs to cover his position and hedge, so he would buy 100 shares of stock(in case I exercise) thus having an impact on the underlying price.


Essentially, my system would buy an option, and right after getting the fill, would place an order for the stock in an attempt to get in prior to the market maker entering his covering trade.(buying the underlying) The market maker would then enter the market, pushing the stock higher.
Obviously, for this to have an impact, many options would need to be purchased(1 call for 100 underlying shares won't really move apple or a big stock) so as to maximize the impact onbthe underlying.

This is just an idea I came across and there are obviously flaws. I just wanted your thoughts on whether or not this system would be viable.

Thanks and looking forward to hearing your thoughts on the idea.
 
Possibly, if you can execute this at about 1/200th the speed at which you can blink your eyes.

Additionally, you will need the funding of Croesus for such a capital intensive strategy to overcome the existence of "a" commission structure and the sliver of premium your trying to make.
 
cedthetrader said:
Hi,

I came up with an idea for automated trading, which would require trades to be entered and exited quickly. Say I place an order to buy 1 call option(100 shares). The market maker selling me the option needs to cover his position and hedge, so he would buy 100 shares of stock(in case I exercise) thus having an impact on the underlying price.


Essentially, my system would buy an option, and right after getting the fill, would place an order for the stock in an attempt to get in prior to the market maker entering his covering trade.(buying the underlying) The market maker would then enter the market, pushing the stock higher.
Obviously, for this to have an impact, many options would need to be purchased(1 call for 100 underlying shares won't really move apple or a big stock) so as to maximize the impact onbthe underlying.

This is just an idea I came across and there are obviously flaws. I just wanted your thoughts on whether or not this system would be viable.

Thanks and looking forward to hearing your thoughts on the idea.
More...

What makes you think their market making algorithm didn't simultaneously put in the hedge (assuming they dont already have it and even want it) as they were executing your options order? The serial event sequencing assumption is too great in this case. You'll get your lunch eaten by the bigger faster kid on the block using this strategy... but I like liquidity.
 
Last edited:
The flaw in this idea is that it's incredibly obvious and already being done by the option MMers. Find another gimmick.
 
You must log in or register to reply here.
Back
Top