new option cancel fees for IB

Quote from Madgenius:

First, I am an option market-maker at an exchange.
I don't get paid any money from cancellation fees.
Exchanges collect the fees and they aren't making much money.

My understanding is the fees were imposed because of
the actions of relatively few customers.

These customers have used computer order entry systems
to enter and cancel hundreds of orders per minute, in many
products, all day long.

Should they be allowed to do this?
I could argue either side.

The bottom line was that these orders were using massive
amount of systems resources with few executions.
They were slowing down the system and preventing the
exchange from operating properly.

Unfortunately, this hurts all customers.
That hurts my business too,
but if it were my decision I'd probably decide the same.

What would ET members propose as an alternative?
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I would propose that the exchange upgrade it's system resources for starters.

Also, I'd point out that market makers are constantly replacing their B/A which is exactly what retail traders are doing when canceling or modifying orders. why should MM's be a preferred class of people?

If some few are indeed abusing the system, I'm certain they can be identified and dealt with on a case by case basis rather than set out to screw retail traders.
 
Quote from Catoosa:

Individual traders provide liquidity as do market makers; So, the only reason for the cancellation fee is to put individual traders at a disadvantage. If individual traders could provide enough liquidity, there would be no need for market makers. The fees make it more expensive for all buyers and sellers. The fees had to be approved by regulators; So, we know whose interest the regulators are looking out for. We should complain and try to put pressure on our congressmen. Just some of my thoughts.

Catoosa
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Truer words were never spoken... if traders do not complain to CBOE and to SEC/Congress etc. then we deserve what we get.

The public/retail/off-floor traders DO provide liquidity. But I respect the right of MMs to trade on the floor and make markets. I'm willing to take that challenge. But now these exchanges aren't satisfied that all are having a tougher time... on floor and off to some degree. Nope. They only want the off-floor guys to bear the brunt of the current "tougher" market paradigm/dynamics.

And there is no valid reason for that.

NOW IF they would start the cancel fees AFTER a certain specified number of cancel/modifications... maybe it would be minimally more palatable. But on April 15th not only do we gotta pay Uncle.. but now we gotta contribute to the "MMs and Exchange Officials' Retirement Fund"

No doubt this rule was enacted to again see that the playing field stays uneven. Overly wide spreads just aren't enough, I guess.

Ice:cool:
 
Madgenius,
Thank you for your input which is helpful in understanding the other side. The exchanges need to do something that solves the problems with the excess cancellations by the computerized trading, if that is the root cause, and not put cancellation fees on all buyers and sellers. That is not what has been done and the actions of the fee implication on all tells a different story.

Catoosa
 
Quote from corvus:



This is supposedly why EUREX added cancellation fees as well. I might believe it for EUREX in a liquid futures market, but I am not so sure about options markets.

And anyway, if it is "aimed at the few" why is the majority punished? Like I said earlier, why do I pay a red cent when I do one trade a day and end up cancelling my trade for that day? How about simply charging a fee for cancellations above a certain threshold, rather than this stupid charge/credit method?

And in addition, what the hell sort of bassackwards logic is it for the exchange to throw up barriers to trading? Don't they WANT people there? This sort of behavior causes alot of people to question whether trading on that exchange is cost-effective for them. As a market-maker, shouldn't you be pissed off too that the exchange is trying to drive away YOUR customers?
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EXCELLENT points...

exactly right

CBOE faxed me some documents this morning. Will review them and see if they shed ANY light on their reasons. I doubt there are "legitimate" reasons beyond what we heard on this board about some abusers. IF I changed orders more than a certain number of times such that is became a so-called "abuse" then maybe I should pay extra fees. But now, if I place a few trades on a given day and modify the orders a couple times to better the price, I gotta pay a cancel surcharge PENALTY, in addition to absorbing the spreads that are not in decimals.

(b.t.w. - miss you bro... will look for you later in week at the usual locale) :D

Ice :cool:
 
Quote from Catoosa:

The exchanges need to do something that solves the problems with the excess cancellations by the computerized trading, if that is the root cause, and not put cancellation fees on all buyers and sellers.
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One wonders why the exchanges have chosen not to incur the large fixed expense (computer upgrade) yet.
 
I heard some good stuff.

Yes, a threshold is a good idea.

OK let's says it's order size, what size?
10, 20, 50

or volume per day, how many orders
should you get for free?

-----------------

Am I pissed off, because my business is being hurt?

No, I long ago learned that I have no control over
these things, I'll try to make do with less customers.

-----------------

Are market makers a preferred class?

Yes.

I pay alot of money every month.
Between seat lease, technology fees, exchange fees etc.
I also provide two sided markets all day in a bunch of products.
In excess of 1,000 quotes.

No customer comes close to providing that much liquidity.

For this I get trade on the bid and offer, but not often.


-----------------

I won't claim to have any power within my exchange
but I know the people who do.

It seems like exchanges are alienating small customers
with this rule. I want to be a member of the exchange
that doesn't. I will talk to someone who can help.
Who knows what will happen.

----------

finally MMs and floor officials don't get any of the
cancel fees, the exchanges get the money.
 
Quote from Madgenius:

I heard some good stuff.

Yes, a threshold is a good idea.

OK let's says it's order size, what size?
10, 20, 50

or volume per day, how many orders
should you get for free?

I won't claim to have any power within my exchange
but I know the people who do.

It seems like exchanges are alienating small customers
with this rule. I want to be a member of the exchange
that doesn't. I will talk to someone who can help.
Who knows what will happen.

finally MMs and floor officials don't get any of the
cancel fees, the exchanges get the money.
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you're a class act for taking the time to consider all points of view AND more importantly smart for looking into this issue. I think you and others gotta be careful in these markets not to kill more golden geese so to speak. Maybe the geese don't lay as many eggs right now... but never forget that it can always be worse. No different than only looking at what one can make rather than considering the loss parameters as well. And in the case of these seemingly 'arbitrary' fees on all size retail orders, it seems the exchange officials are only looking at what they can make, forgetting the downside (which is insidious loss of more business beyond what the current bear market dynamics and competition, have dictated).

I love options. I trade a lot in many equities and indexes. But there could come a time soon, when I just decide to trade futures and equities; not put up with this kind of arbitrary "penalty" or deal with the spreads and pricing, anymore. Because it ain't the dough that is the main issue here, but the decision-making and how it could or might be affected by these kinds of cancel fees.

I can change my KLAC or QLGC orders without penalty; why pay more just to trade their options?!

Good luck bro.... hope you have a good year. Maybe you can create some instant karmic returns by looking into this matter and getting the exchange to modify their positions! :D

Hope the markets offer good trading in the last 3 Qs of the year!

Ice :cool:


p.s. if this does not get modified to be "fairer" it is my intention (and I'm sure others') to pursue it further at higher levels.
 
I also appreciate your viewpoint and time;

Please tell us, if you will, do cancelled orders have any affect on you as a MM ? Do you think a fee would affect volume? Would a cancel fee perhaps limit people trying to get inside the spread?

Or is this just a technology problem at the exchanges ? I find that one hard to swallow frankly.

Thanks
 
Quote from Madgenius:

I also provide two sided markets all day in a bunch of products.
In excess of 1,000 quotes.

No customer comes close to providing that much liquidity.
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There is one and only one reason for that: Because customers are not allowed to.

(Some also don't have the equity that would be required to do that kind thing in a retail account, but others do.)

Anyhoo, cancellation fees for those "electronic abusers" would NOT have to take the form of $1 per cancellation. IF those people cancel several thousand orders per day, then a much lower fee should suffice for the exchange to break even:

Let's say we have someone posting bids or offers for 50 contracts and cancelling them 1000 times per hour. That's 50,000 canceled contracts per hour. If they do that for a couple of hours per day they would cancel 100,000 contracts per day. Also note that 1000 orders and cancellations per hour will not slow the system down significantly. In order to notice a drag on the systems (assuming they are not Commodore 64 or Atari 2600) you need at least 20 customers like that, for a total of 2,000,000 canceled contracts per day. If you install new hardware to handle that kind of volume in addition to all the "good customers", it will probably cost $100,000 per year ($400 per trading day), then you need additional bandwidth, which will be another $100 per day. So what the exchange needs to break even is $500 per day in cancellation fees from 2,000,000 canceled contracts. Of course, the exchange does not want to break even, so let's say they charge 4 times that amount in cancellation fees. That comes to $0.001 per cancel per contract. That would be a fair solution.

Did I make any major mistakes? (Even if I am off by a factor of 10 it doesn't really make a difference, I am sure everyone on this board would be happy to pay even $0.01 per cancellation per contract.)
 
Lobster and Madgenius,

Existing rules prevent outside participants from making markets. (see below)

A few important points to note is that

a) it is ALREADY ILLEGAL on all five option Exchanges to constantly post bids/asks. The rule is very vague. ie it is illegal to act as a market maker by constantly posting bids/asks and also illegal to post two sided markets (bidding and asking at the same time)

b) And secondly it is illegal on all five option Exchanges to send electronically generated orders. (There must be some manual input)


Therefore, these cancel fees seem to be aimed at the guy that simply betters the M/M posted markets on occasion. This type of trader does not constantly act as a MM but simply shows up now and again looking to get a fair price. This type of trader will need to adjust to the cancel fees.

Your claims that traders are sending 100's of orders acting as a MM is BS. Perhaps you should read your rule book!


In summary, it is a conspiracy but as the old saying goes, "if you can't beat them then join them". It is pretty cheap to set up a B/D and you can even trade as a remote M/M. (The PSE and BOX will have remote market making).
 
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