Before the recent announcement of IB's decision to sell this part of their business, IB had been a long standing global options market maker. Do you think there is a possibility or probability that IB could trade against its customers? The options market is comparatively illiquid... To dry the liquidity in anticipation of a customer's order placement in the target direction seems easy to do... Is it safer to trade options from a broker that's not a large options dealer at the same time. Does IB become more attractive in this respect after the announced divesture?
IB market making in options - Conflict of interest possible?
- Thread starter Alexander_Y
- Start date
Robert Morse
Sponsor
Yes, Timber Hill can take the other side of your trade.
If not them, then another MM.
As long as your order is subject to price discovery on an a exchange, I don't expect you are harmed by this.
If not them, then another MM.
As long as your order is subject to price discovery on an a exchange, I don't expect you are harmed by this.
Exactly. Timber Hill can still take the other side of your trade, it's just in a few months they'll doing it working for Two Sigma instead of IB.
You'll know they don't have a conflict of interest anymore when they let you place orders on both sides of a specific options contract. Last I checked a while back, IB had this restriction which seemed pretty specifically targeted at preventing customers from trying to make markets in options.
Robert Morse
Sponsor
This is a restriction from some option exchanges that have market makers. They don't want you competing with their market makers with customer priority. You can do this as a professional customer.
Thanks for the explanation. Sounds sleazy, but I guess with all the microstructure complexities they have it makes some sense.
Robert Morse
Sponsor
Rule 6.8C. Prohibition Against Customers Functioning as Market-Makers
(a) TPH organizations may neither enter nor permit the entry of priority customer orders into the Exchange's electronic Order Routing System if (i) the orders are limit orders for the account or accounts of the same beneficial owner(s) and (ii) the limit orders are entered in such a manner that the beneficial owner(s) effectively is operating as a market maker by holding itself out as willing to buy and sell such securities on a regular or continuous basis.
(b) In determining whether a beneficial owner effectively is operating as a market maker, the Exchange will consider, among other things, the simultaneous or near simultaneous entry of limit orders to buy and sell the same security and the entry of multiple limit orders at different prices in the same security.
(a) TPH organizations may neither enter nor permit the entry of priority customer orders into the Exchange's electronic Order Routing System if (i) the orders are limit orders for the account or accounts of the same beneficial owner(s) and (ii) the limit orders are entered in such a manner that the beneficial owner(s) effectively is operating as a market maker by holding itself out as willing to buy and sell such securities on a regular or continuous basis.
(b) In determining whether a beneficial owner effectively is operating as a market maker, the Exchange will consider, among other things, the simultaneous or near simultaneous entry of limit orders to buy and sell the same security and the entry of multiple limit orders at different prices in the same security.
Dear Mr. Morse, thank you. This is an illuminating insight. I didn't know an options exchange could explicitly forbid certain accounts from trading market making patterns.
I have found the primary sources you kindly referred to.
I have found the primary sources you kindly referred to.
I've traded with IB for about 20 years as a customer and last year I hit a threshold in terms of dollar value trading that makes me a professional customer. As a result I pay higher exchange fees and have no customer priority.
Just this past week I asked IB if I could post two sided markets as a "pro customer" (you currently can't).
They are investigating whether it can be done at "all Exchanges" and whether they will allow this at IB.
Hoping they will........
What is roughly the threshold amount? Hope not to cross it so that can still keep paying retail fees.