Interactive Brokers Lost Estimated 25 Million In Q1 On Insider Trading Of Options

Quote from jsmooth:

But regardless if they are trading the deep OTM options; why arent they establishing a delta neutral position to lock in those small gains? I had the impression that they'll buy/sell (make the market) above or below their theoritical pricing model - so if they have a theoritical price of .80; they'll make the market at .70 x .90; then establish a delta neutral position via trading the underlying (or other options).....lock in that 10 cents at expiration? Does the problem arise from volitility? The takeover will have volitility skyrocket, thus making their prior theo value worthless - so they essentially have no hedge, and more or less over leveraged on the losing side of the trade?
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No. The reason why they get their pharcking faces ripped off is because of Gamma.

Delta is dC/ds (partial deriv), and Gamma is d2C/ds2 (again partial deriv), i.e. the rate of change of Delta with respect to the underlying.

Using simple delta hedging, for small market movements - all is cool. As soon as things get a little out of whack they re-hedge. The problem occurs when the movement is rapid and huge - such as a gap from takeover info, then you get wild swings in delta and if that was what your hedging strategy was based on then you're most probably shagged as you're now essentially unhedged.

A Gamma neutral strategy would entail taking effective asset positions whose deltas in the book offset each other.
 
Quote from Equalizer:

No. The reason why they get their pharcking faces ripped off is because of Gamma.

Delta is dC/ds (partial deriv), and Gamma is d2C/ds2 (again partial deriv), i.e. the rate of change of Delta with respect to the underlying.

Using simple delta hedging, for small market movements - all is cool. As soon as things get a little out of whack they re-hedge. The problem occurs when the movement is rapid and huge - such as a gap from takeover info, then you get wild swings in delta and if that was what your hedging strategy was based on then you're most probably shagged as you're now essentially unhedged.

A Gamma neutral strategy would entail taking effective asset positions whose deltas in the book offset each other.
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oh i c...That makes sense. Thanks alot, great post.
 
Quote from Equalizer:

No. The reason why they get their pharcking faces ripped off is because of Gamma.

Delta is dC/ds (partial deriv), and Gamma is d2C/ds2 (again partial deriv), i.e. the rate of change of Delta with respect to the underlying.

Using simple delta hedging, for small market movements - all is cool. As soon as things get a little out of whack they re-hedge. The problem occurs when the movement is rapid and huge - such as a gap from takeover info, then you get wild swings in delta and if that was what your hedging strategy was based on then you're most probably shagged as you're now essentially unhedged.

A Gamma neutral strategy would entail taking effective asset positions whose deltas in the book offset each other.
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This is a great point...
But using insider information to load up on options before a Big Move...
Is a great way to get caught... and can result in quality Jail Time.

IB has moved from straight Broker...
To very conservative Market maker...
To MM that takes many directional positions all over the place.

(In terms of my IB stock trading...
IB taking the other side has gone from 3% to 8% ** in the last 6 months **).

Why IB would complain about a $25 loss...
To "insiders" taking medium to long term positions against them... is beyond me...
It's the cost of doing business.
 
Cry me a river. That's part of the game, and the market makers do quite well at the game. They don't like it, maybe they should give up their cartel and let traders try their hand at making markets. Nope, instead they'll make sure the exchanges keep charging $1.50/cancel to make sure that never happens.
 
Quote from jsmooth:

But regardless if they are trading the deep OTM options; why arent they establishing a delta neutral position to lock in those small gains? I had the impression that they'll buy/sell (make the market) above or below their theoritical pricing model - so if they have a theoritical price of .80; they'll make the market at .70 x .90; then establish a delta neutral position via trading the underlying (or other options).....lock in that 10 cents at expiration? Does the problem arise from volitility? The takeover will have volitility skyrocket, thus making their prior theo value worthless - so they essentially have no hedge, and more or less over leveraged on the losing side of the trade?
More...

Even if you established a delta-neutral position, it won't stay neutral after a big move on the stock.
 
Quote from SWScapital:

For some reason I dont feel bad about market makers losing money for any reason.

Maybe i`m just a cold hearted bastard. :D
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No... you are a realist.

An interesting aspect of this...
Is that IB probably has the best Market Surveillance in the business...
As opposed to many large Wall Street dinosaurs that have ZERO Market Surveillance.

IB probably knows with some certainty...
Which insiders are ripping them off...
And is probably selectively closing accounts all the time... for ANY reason.
 
Regardless of how the system should be, if call volume surges before big deals are made, doesn't that make for good trading for the traders who buy into the option volume surge?

I have never traded options, but if the article is true, then it should be simple to see the insider action within the market statistics and go along for the ride, right? What would one look for to identify this insider activity, is it volume surge or skewed valuation due to the buying surge? What are the clues that this activity leaves on the tape?
 
Quote from Thug_Life:

Regardless of how the system should be, if call volume surges before big deals are made, doesn't that make for good trading for the traders who buy into the option volume surge?

I have never traded options, but if the article is true, then it should be simple to see the insider action within the market statistics and go along for the ride, right? What would one look for to identify this insider activity, is it volume surge or skewed valuation due to the buying surge? What are the clues that this activity leaves on the tape?
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Your general thrust does not make logical sense.

You propose to compete with various highly skilled and corrupt insiders...
While being an outsider...
And getting your information third hand and watered down.
 
haha, we are all outsiders competing with insiders. That goes for any financial market.

Does insider option trading, assuming it exists as described in the OP, not leave tracks on the tape? Tape reading is not competing with insiders; it's trying to follow them. If the theory of corruption is true, then there should be a way to profit from it.
 
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