How do option spreads execute?

C

CaroKann

Firstly, I assume that you won't see a new bid/ask placed in the market when you enter a spread order, because you have a limit for the whole order and not for each leg. So, are spread orders posted somewhere? Does a floor trader just keep the order written down until he can fill it? How does the broker keep track of the order and guarantee both legs filled at the same time? Are spread orders executed against other orders in the market, or only against other spreads, or does the broker do it in-house?
 
Spreads actually trade more than outright options. If you call a floor broker you can get a bid/offer for a certain spread. If a outright option is done on the floor, the floor usually hedges the risk with other options.

rtharp
 
Unless he doesn't want your business the floor broker won't quote you a price that is worse than what you would get by manually legging in at that point in time.
 
There used to be floor trader/brokers in the CBOT pit who
made the market in the spreads. They flashed the other leg
of the spread as soon as they received an order from a customer. It was a cumbersome task considering the computing
power for wireless available. Now it maybe somewhat computerized - the problem is to do spreads that are not
close approximity on the floor. CBOT and to some extent
CME had resistance to computers, despite GLOBEX.
 
There are several online brokers that allow spread orders now (mr stock, optionsxpress).. I would think that could put a large strain on floor brokers if they had to give quotes all the time. It looks like mr stock just takes the bid of one side and the ask on the other (available electronically) and quotes that as the spread price. Presumably, once you actually place an order then it goes to the market, but they dont bother floor brokers with getting quotes before that. So the next question is, how does a broker actually place a spread order, and can it all be done electronically (from the brokers perspective). i.e. it doesnt matter if they print out the order on the floor and a person works it, as long as the broker interface is electronic. I am asking because I am wondering how much work it would be for, say, IB (interactivebrokers.com) to add electronic entry of spread orders.
 
IB could easily package up the pricing on spreads. However the problem is the risk of execution. Here is the "official" firm response:

"We are working on, and in some cases have already released, combination trading capability. We are, however, providing this feature only for those exchanges that accept combination orders. We are not currently planning to provide simulated combination trading capability because we are not willing to take the risk of some of the legs being taken out before we can complete the trade. In other words, it is quite possible that when we send out an order to buy A and sell B, one leg will execute and the other will not, either because it traded ahead, or the price changed or the exchange went down, or the connection was interrupted, etc.

This problem is especially serious with the semi-electronic exchanges in the U.S. We expect this to improve as more of these markets will go electronic or will be replaced by ones that do, in the next year or two."
 
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