Quote from xflat2186:
Just the facts..
The market does not have to fill other orders on the price of your order. If you split the bid offer spread and if that series trades on your price then you get your 1 or 2 lot.
If the market going in on a particular a call series you want to trade was 19 bid... offered at 23 and you bid 21 for a 2 lot the mm's are under NO obligation to fill any other orders at a price of 21. The beauty of that is that if another order for greater size comes in and is placed on the box, say an order to pay 20 for a 50 lot, your 21 bid for 2 actually protects that order since now no one else but the pit can see that 50 lot bid and when the futures move down to the appropriate price they will simply sell your 2 lot at 21 and then sell all 50 at 20 immediately so long as the futures fall to a price where they feel there is sufficient edge as to buy the futures and sell that 50 lot at 20. If the futures move up they wonât bother filling your 2 lot nor would they be interested in selling the 50 lot at 20 bucks. But it gets even better, if other orders in nearby strikes come in and they end up buying options from those other orders they always have both your 2 lot and the hidden 50 lot to lean on in order to sell them at a higher volatility level then they just paid in a different strike.
In essence the 1 and 2 lots are helpful in allowing the pit to lean on any other orders that might be out there. The beauty of the âout backâ or the large collection of mmâs who only trade 10 up is that they keep the bigger greedy mmâs from leaning too long on those hidden gems like the rare 50 lot that might be put on the box. The 10 lot crew is more willing to trade the 1 and 2 lots for a lesser amount of edge then the big firms.
Of course almost all the of the size order flow, say 25 lots and higher donât get put on the box and theyâre held orders by floor brokers. Also, few of them are retail orders and only retail orders have standing in the pit. So all the off floor orders that come from prop houses and institutions have no standing donât get put on the box for all to see and contracts can trade all day long on their price and they donât have to be filled. Then again most of that order flow is shopped to other prop firms and other off floor liquidity providers before those orders ever hit the pit. Then the floor broker simply walks into the pit and since he now has both the buy and sell side of the order he crosses it at a pre agreed upon price and he may dish some off to the mmâs to keep them happy.
It all has a place in the market and unfortunately in a product like the SPX since its aimed at the institutions not the retail guy, that little 1, 2 and 3 lot retail guy gets screwed.
