Must brokers route spreads to the exchange?

B

buysellhold

What are internalization and best execution obligations for US equity options markets? If I submit an options spread / combo order, is the broker / market maker obligated to route it to a public exchange as a spread order or can they just sit on it until it's marketable?

My concern is that suppose a 10 CALL is trading at 0.2 / 0.24 and 11 CALL is trading at 0.1 / 0.14. In this case, the midprice of the 10/11 credit spread is 0.10 but the bid/ask of the spread is 0.06 / 0.14. If I put in a buy order at 0.11 to the complex order book, I would expect someone to be happy to fill it. However, if the order gets routed to a market maker, are they obliged to actually send it to the exchange as a combo or can they just sit on it / work one of the legs on an exchange?

The reason I ask is that I have several brokers and I want to determine if fill quality between them can differ substantially or not.
 
Well, Bob Morse will be in here to tell you the same, I'm sure, but in the example you give, the best bid and best offer could be on separate exchanges, while the order itself will only go to one--sometimes with quite a large effect on fill price.
 
buysellhold said:
What are internalization and best execution obligations for US equity options markets? If I submit an options spread / combo order, is the broker / market maker obligated to route it to a public exchange as a spread order or can they just sit on it until it's marketable?
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They can sit on it until it is marketable. IB only exposes complex spreads to their internal option dark pool. Only other clients see it. It does not rest on any COB. Unless there has been a change in the last 2 years.

buysellhold said:
If I put in a buy order at 0.11 to the complex order book, I would expect someone to be happy to fill it.
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Not really true. An option MM that monitors the COB with what I call an electronic eye, looks to make money vs their fair value, not midpoint. That margin of profit they look for will differ from symbol to symbol and month to month,
 
Robert Morse said:
They can sit on it until it is marketable. IB only exposes complex spreads to their internal option dark pool. Only other clients see it. It does not rest on any COB. Unless there has been a change in the last 2 years.



Not really true. An option MM that monitors the COB with what I call an electronic eye, looks to make money vs their fair value, not midpoint. That margin of profit they look for will differ from symbol to symbol and month to month,
More...
An unsurprising participant ;) with a surprising answer...good to know!
 
What about Lightspeed? I noticed you guys offer direct routing for individual options but I believe only SMART for spreads -- if I submit the options order with you, would it hit the exchange's COB?
 
For accounts that custody at Wedbush (We introduce to IB too), on most of our DMA software, we offer both SMART and DMA for option spreads. Our SMART option orders and spreads go to an exchange, you just can't pick which one. We also offer DMA option spreads on Sterling Trader, Realtick and Silexx but we don't track maker/taker fees on spreads. We do on single leg orders on those platforms.

This is easier to discuss over the phone for more details as this can be confusing.
 
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