Making a 2-way market with options

T

tonyf

I care to place buy and sell orders simultaneously. Now I understand from IB that this not allowed with options, and have opened a second portfolio management account (with IB) as a work around.
Now is there a way to link those 2 accounts so they share the same margin sort of speak? I would ideally want long positions to net off short positions and reduce the maintenance margin.
Thanks
 
is this US equities? even if you could post a 2 sided market won't you still end up buying the offer/selling the bid. are better retail orders shown?
 
tonyf said:
I care to place buy and sell orders simultaneously. Now I understand from IB that this not allowed with options, and have opened a second portfolio management account (with IB) as a work around.
Now is there a way to link those 2 accounts so they share the same margin sort of speak? I would ideally want long positions to net off short positions and reduce the maintenance margin.
Thanks
More...

why would you do this unless you are trying to be a market maker. That's a super competitive business and running your orders through IB would be like trying to win the Monaco GP with a Nissan Rogue. (the investment of the various competitors would be about on par with the analogy).
 
If you do more than 390 orders per day, you will be classified as pro. From what I understand you will face a new set of headaches. It might not be worth the work.
 
It is prohibited at IBKR because it is illegal on some exchanges (not all). Here is the CBOE rule:

Rule 8.20. Prohibition Against Customers Functioning as Market-Makers

(a) TPH organizations may neither enter nor permit the entry of priority customer orders into the System if (1) the orders are limit orders for the account or accounts of the same beneficial owner(s) and (2) 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.


So opening two accounts and doing this would likely get you in some major trouble. IB Compliance will find out because they will link all accounts that you are associated with.


As stated above - it is legal to do this as a Professional Customer. However, I would not recommend this as fees are higher and fills are worse. Also, IBKR (as far as I know) does not allow this even for Professional Customers (as of 3rd qtr 2020).
 
@mskl is spot on. Paralax out of San Francisco is the poster child for this. They have become the third/fourth(depending on the day)largest MM acting as a professional customer. You'll need massive scale in technology and communications and when your all done you be tens of millions in infrastructure. Keep in mind 5 or 6 names are about half the exchange flow most days and they are probably equal size upstairs most days.
 
Did you ever wonder why we were allowed to make 2 way markets in pretty much everything else but options?

It smells like a protectionist move from CBOE for the benefit of few and nothing more. I wonder if it is the case in the EU options market where such behaviour is reprimanded.
 
It is protectionist - so what? You have 16 competing exchanges
It was allowed by the ISE at one time and nobody came.
MM have to make markets - most folks who claim to be providing liquidity go back into the weeds when volatility spikes.
The CBOE consortium is a modest player and they're not the driving force here.
CBOE promoted the Professional Customer rule to accommodate folks who wanted it.
Join BOX as it costs very little, you still have a quoting requirement.
 
Rules like this one and the "390 rule" were introduced years ago when customer priority actually was worth something. The idea was they didn't want customers acting like market makers (jumping the queue) which was understandable.

Today customer priority only exists in theory (with fragmentation and price improvement rules you virtually will never receive CP). I have spoken with many of these Exchanges and they refuse to change these "outdated rules" or allow for unlimited orders as a regular customer with NO customer priority. These folks should review their own rules proposals when they were introduced years ago and they would see the reasons the Exchanges introduced them simply don't exist in todays marketplace. However their "preferred customers" (hft's etc) want to keep these rules. You see - the hft's want the market to be two tiered - one with customers they want to trade against and one with customers they want to ignore.

No other global exchanges have such rules.

In fact, Citadel in recent comment letter suggested to the SEC that there should be similar rules in the equity market (ability to identify high volume customers).

I use to get quite upset about this kind of thing but have learned that it isn't worth "all the comment letters" to the SEC. You see - when there is protectionism like this - there are opportunities for those who understand the rules. Not great for the long term investor but great for people like me......

Just look at avg spreads in the option market......
 
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