ib must be selling order flow on options

[freehouse]

Quote from Option Trader:

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.

A good suggestion would be to have a public "spread book" available to all IB customers. Assuming that the customer wants his order to be shown, IB could display all of their spreads in real time to their customers (Think or Swim does this).

The CBOE now publishes their spread book (all spread orders working on the CBOE) only during market hours:

http://www.cboe.com/cob/cob.aspx

However, since IB is working most of the spreads upstairs in the black box, only IB customers will see it. It would thus make sense for IB to work spread orders on an exchange (i.e., the ISE or CBOE) so more people will be able to see these spreads and possibly trade against the spread order.

Therefore, it makes the most sense for option spreads to be sent to either the ISE or CBOE if it cannot be executed. Once the option order can be executed, SMART would cancel the order from the ISE or CBOE and then electronically leg the spread to get the execution (i.e., but 1 option on the PHLX, sell 1 option on the ISE).

 

[freehouse]

Quote from Option Trader:

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.

Yes, it could be a market maker with a hidden order marked to the bid-ask spread (i.e., it changes with the bid-ask spread). It could be part of a spread. It could be a customer who wants to sell (or buy) a lot of options at a price but does not want the order to be shown. We do not know who the "hidden order" is from.

Also, it could be based on volatility, or the price of the underlying.

 

[Option Trader]

Quote from freehouse:

Yes, it could be a market maker with a hidden order marked to the bid-ask spread (i.e., it changes with the bid-ask spread). It could be part of a spread. It could be a customer who wants to sell (or buy) a lot of options at a price but does not want the order to be shown. We do not know who the "hidden order" is from.

A customer with a hidden order there would certainly get filled at the price he placed the order. The issue we were discussing was MM's, if they are able to have "hidden orders" there that go through at that price only if you, as the counterparty, place your order at that middle price, but if you buy at their displayed price then the displayed (wrip-off) price would go thru.

 

[freehouse]

Quote from Option Trader:

A customer with a hidden order there would certainly get filled at the price he placed the order. The issue we were discussing was MM's, if they are able to have "hidden orders" there that go through at that price only if you, as the counterparty, place your order at that middle price, but if you buy at their displayed price then the displayed (wrip-off) price would go thru.

Sure this can happen. If I am a broker-dealer or market maker I can place these types of orders. However, I am guessing that it would be unlikely that the customer would get an immediate execution if he were trying to split the bid-ask spread.

Remember, with multiply listed options, the most ideal situation would be the elimination of all order flow payments. Thus, order execution would be dependent on the best bid and the best offer. However, once one exchange starts paying for order flow all the other exchanges have to follow or else they will lose business to their competitors.

So now, hypothetically, all market centers are paying the same amount for order flow on the same option. Thus, how is the option exchange going to get order flow? Some of the exchanges are now moving to the make or take order flow model (i.e., if you provide liquidity you will get compensated, if you take liquidity, you will pay for it). Other market centers will have "hidden orders" where you will get an execution if you buy 1 tick away from the offer or sell 1 tick away from the bid.

I can tell you that the CBOE was doing this in EWZ options last month. If you placed a limit order 1 ticket away, you got an execution. Don't know if they are still doing this this month. I have not traded EWZ options since earlier this month.

 

[Option Trader]

Quote from freehouse:

Sure this can happen. If I am a broker-dealer or market maker I can place these types of orders. However, I am guessing that it would be unlikely that the customer would get an immediate execution if he were trying to split the bid-ask spread...

Come to think of it, I have experienced numerous times in both stocks & options trading where I place a mid-point order, and I felt it was taken out at the speed as if I bought at the ask. So whether it is hidden orders, or triggered orders, these types of orders YES seem to be instantaneous.

I am walking away with the assumption, in part based on your input about MM's involvement, that it seems this syndrom of getting filled at the midpoint if you place the midpoint & you get filled at the ask if you place the ask, means your counterparty is a MM, because retail parties couldn't do that with their hidden orders.
If anyone knows otherwise, please correct me.

 

[kiwi_trader]

If your computer is fast enough and close enough to the exchange then you can fill faster than the remote users software will register its existence ... to all intents instantaneously.

 

[Option Trader]

Quote from kiwi_trader:

If your computer is fast enough and close enough to the exchange then you can fill faster than the remote users software will register its existence ... to all intents instantaneously.

I don't know about that, because some of those fills come the moment you send the order.

 

[donnap]

Quote from jimrockford:

I've been trading thru IB for years. I have made very many suggestions for bug fixes and improvements to IB's SMART order routing algorithms, which IB did implement. This gives me some experience and insight into IB's decision-making and ethics.

B]

Hey Jimbo,

I've been with IB for years as well. The default routing exchange used to be ISE. SMART would usually send it there and the fills were often good and I would agree that back then they tried to get their customers good executions.

Then it changed, SMART usually routs to CBOE now - and exactly when does SMART switch to an exchange with a better price. If it does it at all it's slow often missing that price.

I agree with OP - it can be very frustrating - and yeah, I go with only very liquids now so I don't have to manage orders for hours with SMART.

 

[jimrockford]

Quote from donnap:

Hey Jimbo,

I've been with IB for years as well. The default routing exchange used to be ISE. SMART would usually send it there and the fills were often good and I would agree that back then they tried to get their customers good executions.

Then it changed, SMART usually routs to CBOE now - and exactly when does SMART switch to an exchange with a better price. If it does it at all it's slow often missing that price.

I agree with OP - it can be very frustrating - and yeah, I go with only very liquids now so I don't have to manage orders for hours with SMART.

IB is probably unaware that their change is giving you inferior executions. You need to persuade IB of this fact, using rational arguments, instead of accusations that IB has dishonest motives.

 

[kiwi_trader]

Quote from Option Trader:

I don't know about that, because some of those fills come the moment you send the order.

LOL. Define "the moment."

Assuming you are remote from the exchange your ping is probably at least 100 ms round trip.

So you submit an order. Something happens to acknowledge and present it on the exchange. You get confirmation (delayed by at least your ping 50ms)

While your internet connection and any computing delays occur that order has appeared to a tightly coupled host (ask Nitro what his delays are) and they submitted the opposite order and filled. Nothing surprising ... there are many fish in this sea.