Can anyone point me to info that describes how options pricing works from the microstructure / trading perspective (rather than the theoretical option model perspective)? Particularly differences in how bid/offer algorithms are configured to respond to orders that are submitted.
I'm interested in this because I've been placing a lot of orders inside the market for different options that have relatively wide spreads (.15+) to see what kinds of responses I get. Let's say that a particular strike is quoted at 3.05 - 3.20. In some cases, if I offer at 3.15, I'll get filled immediately. Most often, the bid will immediately jump to 3.10 or even 3.15, the offer will stay at 3.20, and I won't get filled. When I cancel the order, the spread immediately returns to what it was before.
Here's one example: the spread for the FXE Oct 127 put was 2.45 - 2.58 at one point today, and I put in a buy order at 2.54. The bid immediately jumped to 2.50. I canceled the order a couple of minutes later and the bid dropped right back to 2.45.
I've been trying this with very small size (1-5 contracts), so it doesn't seem related to trying to move large orders. Factors like volume, OI, IV, or what the underlying is don't seem to make a difference either. It's so fast that it's clearly automated, not a human. I've tried it via ToS/Ameritrade and OptionsHouse with about the same results (although I actually seem to get price improvement more often with OH).
There's only so much that experimentation can tell me, so anyone with insights or pointers to documentation of any kind would be appreciated. I've read things like Harris' Trading & Markets, and Augen's Day Trading Options, but they don't get that granular.
Thanks,
Will
I'm interested in this because I've been placing a lot of orders inside the market for different options that have relatively wide spreads (.15+) to see what kinds of responses I get. Let's say that a particular strike is quoted at 3.05 - 3.20. In some cases, if I offer at 3.15, I'll get filled immediately. Most often, the bid will immediately jump to 3.10 or even 3.15, the offer will stay at 3.20, and I won't get filled. When I cancel the order, the spread immediately returns to what it was before.
Here's one example: the spread for the FXE Oct 127 put was 2.45 - 2.58 at one point today, and I put in a buy order at 2.54. The bid immediately jumped to 2.50. I canceled the order a couple of minutes later and the bid dropped right back to 2.45.
I've been trying this with very small size (1-5 contracts), so it doesn't seem related to trying to move large orders. Factors like volume, OI, IV, or what the underlying is don't seem to make a difference either. It's so fast that it's clearly automated, not a human. I've tried it via ToS/Ameritrade and OptionsHouse with about the same results (although I actually seem to get price improvement more often with OH).
There's only so much that experimentation can tell me, so anyone with insights or pointers to documentation of any kind would be appreciated. I've read things like Harris' Trading & Markets, and Augen's Day Trading Options, but they don't get that granular.
Thanks,
Will
