How do institutions buy/sell large amounts of options?
- Thread starter Pekelo
- Start date
It seems like you have to pick your poison here. If you want a 100 lot without getting pecked to death by 1 lot fills, then you do all or none and let the little stuff pass you by until volume comes to you. I haven't used it enough to know if it's viable or not in terms of getting a good fill etc... But IB has it as an option and I was just wondering if JSOP had considered it.
Robert Morse
Sponsor
I have used AON before. It's even worse. The order just sits there FOREVER with me ending up missing the trade unless I chase the market. I was at least getting some fills without AON but with AON there, I wasn't getting fills at all. The crux of the problem is that the liquidity is just not there. Nobody is there in the exchanges to take the other side of your transaction. I never knew that institutions can just trade off-exchange and then leaving us retail traders fighting each other for the fills on the exchanges. The institutions, with their 1K, 10K orders are the ones that provide the volume but they are trading with their "exclusive MM's".
I need to dabble with it in the FOPs and see what happens. It sounds bad.
100 options isn't exactly a lot...
This is usually the process in brokered options:...
Large volumes usually trade with a delta hedge attached.... that's because if an OTC broker is working 10.000 options, it will likely take some time. So a MM will give a price, based on a reference price in the underlying. Say, INTC ref 54.80, May 55 call - 0.75@0.85 for 2.5k size.
Than the broker can work that market and get it tighter.. to say 0.77@.83 for 5k, 2 or 3 MMs. Then their client can come in ... Seller for 15k @0.78... MMs respond by plucking it off, or staying put @0.77... Broker might get a desk at a bank involved to built the size... see who's interested.
If it starts trading, because someone says "buy @0.78 for 5k"... then the rest usually follows.
When that trade is basically done, you agree on the delta, with the reference price still at 54.80... so say delta of 48. Options go through, either during hrs or after hrs.. and the stock hedge will follow on the back-end at clearing level... you usually don't see that stock volume on-exchange. If the current spot is off the reference, the delta (obviously) can make a big difference...If the current spot is way off the reference... dollars... , you could re-price the entire thing... sometimes it busts. Sometimes you don't re-price and if you're a buyer you might make extra money on the trade since you would gain on the gamma.
These MMs are all the usual suspects. They quote OTC in size (like in my example) and the quote on-screen.. in lesser size... either minimum required, or bigger if the edge is larger. The reason they quote in smaller size on-screen is because they have the added risk of delta exposure. This is the reason your order of 100 lots is broken up in several executions.
If they get filled at their bid, they still need to do their hedge.... then, depending on the size they got hit, they might move the underlying spot somewhat initially... and that could be a reason your 100 lots might not get filled fully...
You can't access a MM directly, because they don't have clients. And they don't trade directly with retail, since there need to be all sorts of agreements in place regarding settlement and fees etc. And also, 100 lots isn't really a lot... they are quite busy (usually) being on the phone with OTC brokers and banks etc working many thousands of options... no time for a 100 lot.
This is usually the process in brokered options:...
Large volumes usually trade with a delta hedge attached.... that's because if an OTC broker is working 10.000 options, it will likely take some time. So a MM will give a price, based on a reference price in the underlying. Say, INTC ref 54.80, May 55 call - 0.75@0.85 for 2.5k size.
Than the broker can work that market and get it tighter.. to say 0.77@.83 for 5k, 2 or 3 MMs. Then their client can come in ... Seller for 15k @0.78... MMs respond by plucking it off, or staying put @0.77... Broker might get a desk at a bank involved to built the size... see who's interested.
If it starts trading, because someone says "buy @0.78 for 5k"... then the rest usually follows.
When that trade is basically done, you agree on the delta, with the reference price still at 54.80... so say delta of 48. Options go through, either during hrs or after hrs.. and the stock hedge will follow on the back-end at clearing level... you usually don't see that stock volume on-exchange. If the current spot is off the reference, the delta (obviously) can make a big difference...If the current spot is way off the reference... dollars... , you could re-price the entire thing... sometimes it busts. Sometimes you don't re-price and if you're a buyer you might make extra money on the trade since you would gain on the gamma.
These MMs are all the usual suspects. They quote OTC in size (like in my example) and the quote on-screen.. in lesser size... either minimum required, or bigger if the edge is larger. The reason they quote in smaller size on-screen is because they have the added risk of delta exposure. This is the reason your order of 100 lots is broken up in several executions.
If they get filled at their bid, they still need to do their hedge.... then, depending on the size they got hit, they might move the underlying spot somewhat initially... and that could be a reason your 100 lots might not get filled fully...
You can't access a MM directly, because they don't have clients. And they don't trade directly with retail, since there need to be all sorts of agreements in place regarding settlement and fees etc. And also, 100 lots isn't really a lot... they are quite busy (usually) being on the phone with OTC brokers and banks etc working many thousands of options... no time for a 100 lot.