ib must be selling order flow on options

[Option Trader]

JimRockford,

1. Where have you obtained your information about "hidden orders", as I would like to learn more about that topic? I would have thought from my own reasonig that "hidden liquidity" would be something found by sophisticated traders, and not by the simple retail trader who doesn't quite know what he's doing.

2. It would seem to me that hidden orders would maybe be more common on ISE than BOX, AMEX, and PHLX. So perhaps your suggestion can be for IB to flash the order on ISE alone intraday

With the current situation, IB puts their GTC order on CBOE, and overnight they move the order to ISE for the next day. This does not cost them a cancellation fee, because their GTC orders are simulated GTC orders.

 

[Option Trader]

My opinion about what happened:

Regardless of the overall issue, I believe the order was filled with the second broker on ISE because your counterparty placed a multi-leg order, and his broker only scans one exchange (e.g. ISE) to fill such orders.

 

[freehouse]

Quote from Option Trader:

My opinion about what happened:

Regardless of the overall issue, I believe the order was filled with the second broker on ISE because your counterparty placed a multi-leg order, and his broker only scans one exchange (e.g. ISE) to fill such orders.

That makes sense. The order from the second broker could have been executed on the ISE as part of a spread strategy. The ISE has a spread book. Some of the other option exchanges may have a spread book, but I am not 100% sure of this.

 

[Option Trader]

Quote from freehouse:

That makes sense. The order from the second broker could have been executed on the ISE as part of a spread strategy. The ISE has a spread book. Some of the other option exchanges may have a spread book, but I am not 100% sure of this.

My experience with IB smart route is that they don't lose control of the order, rather they will continue to monitor if they could fill the order even on a different exchange. The above of course would apply only to visible orders.

 

[freehouse]

Quote from IBsoft:

monstercat,

It is a bit more complicated than that. IB will only make a commission if it manages to get your order executed. Even the flow payments and collections only take place when your order gets executed. Hence, it is in our best interest to get your order filled.

I have looked at some stats. For competitive reasons I can't get too much into detail, but consider the following two facts:
- EWZ National Volume Distribution is 23% at ISE and 38% at CBOE.
- When one posts a non-marketable order that betters the market by a tick at CBOE and ISE, he is more likely to get a fill at CBOE. (I know that that is not what you experienced, but looking at all the cases together that is what we find).

I can't explain why the counter-party of your trade liked your order when it was posted at ISE and did not like the same order when it was posted at CBOE.

I am now dropping out of the discussion.

IBsoft

But here is one problem with EWZ options. I am not disputing the ISE and CBOE stats. However, if I am trading EWZ options on the ISE or CBOE, I have to pay an additional 18 cents for the ETF marketing fee. If I have this order executed on the PHLX, I do not have to pay the 18 cents.

Thus, for a 10 lot of options, I pay 8.80 in commissions for an EWZ option execution on the ISE or CBOE, but only 7.00 in commissions for a PHLX execution. Thus, as a customer, if I am going to be placing a bid or offer, all things equal, it would be to my advantage for SMART to route my order to the PHLX instead of the ISE or CBOE even though the PHLX may not have the order flow that the ISE or CBOE has.

 

[freehouse]

A long time ago before IB started charging order cancellation fees, option commissions were the same regardless of using SMART or DIRECT routing. Since the customer now has to pay for (1) order cancellation fees, (2) any removal of liquidity fees, (3) any ETF marketing fee, etc., wouldn't it make sense for IB to reduce the commissions for DIRECT routing from 1.75 to 70 cents (the same price as SMART routing)?

Think about it. It really makes sense from a customer point of view. I am sure that the majority of people will still use SMART, but it does give the customer the control to DIRECT route his/her option order without incurring a penalty (i.e., higher commissions) for doing so.

 

[freehouse]

Quote from Option Trader:

My experience with IB smart route is that they don't lose control of the order, rather they will continue to monitor if they could fill the order even on a different exchange. The above of course would apply only to visible orders.

I agree with this. Also, I have noticed that if I am doing a spread trade the order is held upstairs and watched up the computers. If it can get executed immediately, it will be done. However, assuming that the options trade on the ISE, wouldn't it make sense for SMART to send the spread order to the ISE complex order book and let it work there? I would think that if the order were working on the ISE, there would be a better chance of execution (the order is displayed to all the ISE market makers) then if it were held upstairs and monitored by the SMART computer system (where only IB users can see it).

Again a few years ago, spread orders were placed on the ISE book (assuming that the option trades on the ISE). IB changed this at some time (I do not know when).

 

[Option Trader]

Quote from freehouse:

I agree with this. Also, I have noticed that if I am doing a spread trade the order is held upstairs and watched up the computers. If it can get executed immediately, it will be done. However, assuming that the options trade on the ISE, wouldn't it make sense for SMART to send the spread order to the ISE complex order book and let it work there? I would think that if the order were working on the ISE, there would be a better chance of execution (the order is displayed to all the ISE market makers) then if it were held upstairs and monitored by the SMART computer system (where only IB users can see it).

Again a few years ago, spread orders were placed on the ISE book (assuming that the option trades on the ISE). IB changed this at some time (I do not know when).

I didn't know this. If so, that certainly does make it difficult to buy at the bid. However, for single leg orders, it certainly seems to me that they are able to achieve both simultaneously, i.e. to send to the exchange & they monitor other exchanges.

 

[freehouse]

Quote from Option Trader:

JimRockford,

1. Where have you obtained your information about "hidden orders", as I would like to learn more about that topic? I would have thought from my own reasonig that "hidden liquidity" would be something found by sophisticated traders, and not by the simple retail trader who doesn't quite know what he's doing.

Option Trader,

If you watch carefully with certain options on certain exchanges, the bid-ask spread is relatively wide. You notice that all the exchanges are on the bid and all of the exchanges are on the offer. The reason they do this is because the want the "stupid" retail order flow to hit the bid or take the offer where the market maker can capture the maximum bid-ask spread. However, if you were to put an order to sell (5 cents or 10 cents above the bid) or an order to buy (5 cents or 10 cents below the offer), the market maker/specialist will fill you immediately. These guys have their autoquote set up where they will show the wide bid-ask spread, but will have the "hidden" parameters where small paper shown 1 or 2 ticks away from the bid-ask spread will be executed.

 

[Option Trader]

Quote from freehouse:

Option Trader,

If you watch carefully with certain options on certain exchanges, the bid-ask spread is relatively wide. You notice that all the exchanges are on the bid and all of the exchanges are on the offer. The reason they do this is because the want the "stupid" retail order flow to hit the bid or take the offer where the market maker can capture the maximum bid-ask spread. However, if you were to put an order to sell (5 cents or 10 cents above the bid) or an order to buy (5 cents or 10 cents below the offer), the market maker/specialist will fill you immediately. These guys have their autoquote set up where they will show the wide bid-ask spread, but will have the "hidden" parameters where small paper shown 1 or 2 ticks away from the bid-ask spread will be executed.

So you are saying there is a "hidden order" sitting there. I would have thought they program the computer that if an order is placed at a particular price it would trigger them to fill it.