How to pull the rug on SPX market makers

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HedgefundTrader2

Anyone who has ever ventured to trade SPX regrets to be in this index. SPX trades on a single exchange and lacks competition and pricing efficiency. Its a horrible index to get caught on an expiration Thursday if you are unlucky enough once.

Thursday 8/16/2007 was index expiration, and SPX was being jockeyed around by Hedge Funds and Trading desks up and down to 1370 levels. If you held a position on the day of expiration and if your options were under water, you would be paying a$ 3.00 difference between bid and ask prices. The bids and asks for spreads were equally nasty $ 4.00 and $5.00 ! It was highway ransom money for the market makers! For example Aug 1400 puts were priced at 19.00 bid x 23.50 ask and they would toss you to the side , if you dared to give them $ 1.00 more from the mid prices! The orders won't get filled. They wanted you to come up and shell out the ask at 23.50 ,or no deal at all.

HOW TO DEAL WITH SPX MARKET MAKERS

Here is a technique that you can successfully employ.

You take the mid price and place your order on 2 contracts.
If the bid was 19.00 and ask 23.50 , you place your order at 21.25 or even at 21.00 and watch that wide bid and ask collapse on your screen. Now they are required by law to show your bid, if they don't, call you broker and ask him how come my bid is not there ? Show it. Pretty soon this greedy market maker realizes that he has lots more to lose than gain. With that narrow bid of 21.00 and ask of 23.50, he can lose lots of bigger orders at 20, 30, 50 and 100 contracts, so he fills yours and gets you out of there as fast as he can and the bid goes back to staying at 19.00 x 23.50 on your screen but you are out. You should not increase the size of your contracts more than 2 or maximum 3 otherwise they will let you just languish there for a while.

So keep hitting them with ones and twos and keep hammering them till your entire position is out. Never give more than mid prices. This works on all SPX trades on any given day , try it.
 
Why even trade options with huge spreads. You already have time decay against you, now you have an automatic loss as soon as you make the trade. If you want to make money in options you write them, end of story. Secondly if you want to trade the s&p trade the spy or the es futures. Very liquid, no spread. If you need that much leverage, you are probably underfunded.
 
Quote from RiceRocket:

Why even trade options with huge spreads. You already have time decay against you, now you have an automatic loss as soon as you make the trade. If you want to make money in options you write them, end of story. Secondly if you want to trade the s&p trade the spy or the es futures. Very liquid, no spread. If you need that much leverage, you are probably underfunded.
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Why do you assume I am some kind of a rookie who doesn't write options?

SPY doesn't provides the strikes and safety and premiums and doesn't even compare to SPX when dealing with Iron condors and other strategies. Its liquid thats for sure.

SPX as an index is not bad, its the monoply and single exchange and lack of efficiency and they way its controlled by few market makers that is worst part.

Besides how do you know I am underfunded? Where did you get that?
 
If this works I'll give you a heads up and a PM, I wonder if it'll work for plain ol' equity options.

The problem with doing this is commission, wouldn't be bad if your brokerage charged on a per-contract basis with no trade fees.
 
Quote from day7793:

Anyone who has ever ventured to trade SPX regrets to be in this index. SPX trades on a single exchange and lacks competition and pricing efficiency. Its a horrible index to get caught on an expiration Thursday if you are unlucky enough once.

Thursday 8/16/2007 was index expiration, and SPX was being jockeyed around by Hedge Funds and Trading desks up and down to 1370 levels. If you held a position on the day of expiration and if your options were under water, you would be paying a$ 3.00 difference between bid and ask prices. The bids and asks for spreads were equally nasty $ 4.00 and $5.00 ! It was highway ransom money for the market makers! For example Aug 1400 puts were priced at 19.00 bid x 23.50 ask and they would toss you to the side , if you dared to give them $ 1.00 more from the mid prices! The orders won't get filled. They wanted you to come up and shell out the ask at 23.50 ,or no deal at all.

HOW TO DEAL WITH SPX MARKET MAKERS

Here is a technique that you can successfully employ.

You take the mid price and place your order on 2 contracts.
If the bid was 19.00 and ask 23.50 , you place your order at 21.25 or even at 21.00 and watch that wide bid and ask collapse on your screen. Now they are required by law to show your bid, if they don't, call you broker and ask him how come my bid is not there ? Show it. Pretty soon this greedy market maker realizes that he has lots more to lose than gain. With that narrow bid of 21.00 and ask of 23.50, he can lose lots of bigger orders at 20, 30, 50 and 100 contracts, so he fills yours and gets you out of there as fast as he can and the bid goes back to staying at 19.00 x 23.50 on your screen but you are out. You should not increase the size of your contracts more than 2 or maximum 3 otherwise they will let you just languish there for a while.

So keep hitting them with ones and twos and keep hammering them till your entire position is out. Never give more than mid prices. This works on all SPX trades on any given day , try it.
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Your technique may well work to get you a fill at near mid, but I think you misunderstand the rules. The MM is not at risk of losing the bigger orders- only the 2 or 3 contracts you bid. What will happen is, in the event of a larger order, your orders will be swept from the book and the MM will offer his original bid of 19 or whatever for the balance.

Today was interesting in SPX eh? 4.8 spread across most of the chain. Oink.
 
Quote from showyouwang:

If this works I'll give you a heads up and a PM, I wonder if it'll work for plain ol' equity options.

The problem with doing this is commission, wouldn't be bad if your brokerage charged on a per-contract basis with no trade fees.
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It works. You are concerned about commissions when you save hundreds of dollars on proper mid price fills? What if you were caught on the expiration day with 2 hours to go and 24 contracts on your hand?
 
Quote from resinate:

Your technique may well work to get you a fill at near mid, but I think you misunderstand the rules. The MM is not at risk of losing the bigger orders- only the 2 or 3 contracts you bid. What will happen is, in the event of a larger order, your orders will be swept from the book and the MM will offer his original bid of 19 or whatever for the balance.

Today was interesting in SPX eh? 4.8 spread across most of the chain. Oink.
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WRONG.

Market makers on exchanges are required by law to show all bids so no one can hide orders and give false bids and divert the market activity. Once you have hit them with a mid price bid or less you narrowed the bid and ask gap , anyone can come hit the bid and gets filled and that can be a institutional player with 200 contracts watching your little daring action. That costs the market maker a lot than your small 2 contract order doesn't it?

If you are not a regular SPX trader you may not understand this at all. SPX is an illiquid market for all those reasons.
 
Quote from mde2004:

You are dirt poor, sorry. Options is a risky game that only pros like "I" master.
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That was a highly educated comment you made. I gave you something, you can either take it, and make your life better, or just buzz off and stop making these gruntling noises.
 
Quote from day7793:

WRONG.

Market makers are on exchanges are required by law to show all bids so no one can hide orders and give false bids and divert the market activity. Once you have hit them with a mid price bid or less you narrowed the bid and ask gap , anyone can come hit the bid and gets filled and that can be a institutional player with 200 contracts watching your little daring action. That costs the market maker a lot than your small 2 contract order doesn't it?

If you are not a regular SPX trader you may not understand this at all. SPX is an illiquid market for all those reasons.
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I have been trading SPX options every day for over 5 years. Nonetheless, I don't pretend to know every corner of the CBOE rule book.

I would be grateful if you could provide proof, via CBOE rules, circular or other documentation of your idea that a 2 lot retail bid, that is booked and displayed electronically, will obligate the MM to take 200 lots order at the same price- $200 above his posted bid. My understanding and experience is that only the 2 lot would be available at the improved price.
 
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