idiotic question about options MM

T

thenewguy

I have a question about option MM's. This probably pertains to all MM's, but because of the specifics (see below) I've only noticed it with options.

Consider a very thinly traded option. There's only the MM's prices, say 5.50/6.00. I put an order to sell at 5.90 and all the 6.00's dissappear. I leave it there for an hour, maybe two, wait for the MM to go for lunch, whatever, then delete my ask. INSTANTLY the 6.00 ask is back. I've tried this a bunch and it has always been instantaneous.

So what's the deal here? Are the MM's using an automatic spread creating program of sorts or are they just that quick? What do they use as a model to make the market for each contract?

Anybody know where I can find out the inner workings of option MM's?

- The New Guy

PS. I know this is a very rookie question and I'm prepared for all the flaming that's on it's way!
 
Quote from riskarb:

It's an autoquoting MMing app. Very common now. Sungard and many ISVs write them.
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very cool, thanks. Any idea where i can find out more info on this?

- The New Guy
 
Quote from thenewguy:

Consider a very thinly traded option. There's only the MM's prices, say 5.50/6.00. I put an order to sell at 5.90 and all the 6.00's dissappear.
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You have to enter your sell order at the BID price, which is $5.50.
 
Quote from uninvited_guest:

You have to enter your sell order at the BID price, which is $5.50.
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I don't get it... I'm not asking how to sell the contract the quickest...

I have one contract i want to sell, the ask is currently 6.00 and I want to offer it one point lower than what the MM is offering it at. Hence, I offer to sell it at 5.90.

- The New Guy
 
Quote from thenewguy:

I have a question about option MM's. This probably pertains to all MM's, but because of the specifics (see below) I've only noticed it with options.

Consider a very thinly traded option. There's only the MM's prices, say 5.50/6.00. I put an order to sell at 5.90 and all the 6.00's dissappear. I leave it there for an hour, maybe two, wait for the MM to go for lunch, whatever, then delete my ask. INSTANTLY the 6.00 ask is back. I've tried this a bunch and it has always been instantaneous.

So what's the deal here? Are the MM's using an automatic spread creating program of sorts or are they just that quick? What do they use as a model to make the market for each contract?

Anybody know where I can find out the inner workings of option MM's?

- The New Guy

PS. I know this is a very rookie question and I'm prepared for all the flaming that's on it's way!
More...

What you are seeing is your offer price reflected as the "Ask". When you cancel your offer the next best offer is then shown and that could be the MM's.

I can't imagine what the other replies you got are talking about.
 
Quote from Don87109:

What you are seeing is your offer price reflected as the "Ask". When you cancel your offer the next best offer is then shown and that could be the MM's.

I can't imagine what the other replies you got are talking about.
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Thank you, but that's not what I'm talking about. I guess the title of this thread is misleading... I'm not new to trading, or trading options and I know how level 2 screens work and all that.

What I was refering to is the fact that the 6.00 ask dissappears out of the depth, not that it's there and mine is ahead of it. I mean, as soon as I enter my order, the MM cancels his, and as soon as I cancel mine, the MM re-enters his. I was wondering if this is something they do manually, or if it's a program. I'm trying to figure out how to get better prices on options with large spreads, and I was noticing that sometimes you can "drag" these programs down (by placing really low asks for example, and hoping they don't get filled) to a reasonable price, but I can't execute fast enough to hit that ask before it returns back to the normal ask after I cancel my order.

Man, that reads far more confusing than it should be....

- The New Guy
 
Quote from just21:

I would expect the market maker to join your lower offer instantly.
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Well that's the interesting part. Sometimes they do, sometimes they put an ask in 10 cents above, sometimes they just delete all their orders. I assume that it has something to do with their risk rules programmed in to their models, but I have no idea.

I've tried suckering them into putting asks out at my price, then quickly cancelling my ask and bidding at the same price but I can't do it fast enough to hit it before they revert back to the first ask price (MM alone).

- The New Guy
 
Quote from thenewguy:

Well that's the interesting part. Sometimes they do, sometimes they put an ask in 10 cents above, sometimes they just delete all their orders. I assume that it has something to do with their risk rules programmed in to their models, but I have no idea.

I've tried suckering them into putting asks out at my price, then quickly cancelling my ask and bidding at the same price but I can't do it fast enough to hit it before they revert back to the first ask price (MM alone).

- The New Guy
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Why is this surprising? Almost all option MMs trade based on theoretical prices, once your ask is below their ask, the automated MM program determines whether the spread still need to be maintained, if not, then it will cancel its ask (not need to make the market), based on the fair-value algorithm, its bid is farther from "fair-market" than your ask, so the MM edge is still maintained. Once you cancel your ask, their MM determines the need to create a spread, so the new ask get placed.

As most of the MMs have switched to automated MM algorithms, it is pretty impossible to "sucker" a MM into a situation where their order is "stuck", the normal turnaround time for the MM programs is around 20 ms (tops), especially with CBOE's RMMs, PCX Plus, etc.
 
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