OptEX - Option and Equity traders...
- Thread starter Don Bright
- Start date
Originally posted by Trader101
I didn't take your response as a slam. Hope you don't think I was offended or anything.
No problems....I sometimes upset the options guys who are still playing the game, and I am trying to avoid that when I can.
Don
This came in today...sounds interesting..
From WSJ:
Paul Richards
------------
OPTIONS CONFERENCE CONFRONTS ANXIETY OVER INDUSTRY CHANGES
By KOPIN TAN
DOW JONES NEWSWIRES
PALM SPRINGS, Calif. -- The U.S.- listed options industry turns 30 in
April 2003, but it is already in the throes of a midlife crisis.
Nowhere is that anxiety over identity and values more apparent than at
the annual Options Industry Conference this past weekend here, where
shrinking profit margins and a trading slump accomplished what just one
year ago would seem unthinkable: moved golf down on the list of
attendees' priorities. Instead, 377 industry professionals and guests
gathered to confront the mounting changes affecting everything from
market structure to the way options are traded.
"Over the past year, the velocity of change has caught us all by
surprise," said Kevin Murphy, a Salomon Smith Barney managing director.
"If there is a theme this year, it is 'challenge.' "
The status quo came under attack. Some brokerage firms let it be known
none too subtly that they intend to compete with floor specialists and
market makers -- the traditional liquidity providers -- for the right to
fill customers' option orders.
Exchanges came under pressure to provide more than just a venue where
investors meet to trade. "With exchanges, the question is what added
value do they bring?" said David Krell, chief executive of the fully
electronic International Securities Exchange, which did away with manual
processing and sped up order execution.
New terms were coined. Some panelists raised eyebrows when they referred
to "If then" orders, thereby outing a practice that has gone
unmentioned. Brokers who want to trade against their own customers must
expose these orders to other traders who can match or improve prices,
but floor traders say such orders increasingly aren't exposed but
dangled as a hypothetical; they are so named because a floor broker
might ask, "If I have an order ... then what portion of that can I get
to fill?" This lets the broker test the waters from market to market to
find not just the best price for its customer, but also the most
compliant floor traders willing to share the filling of the order.
Meanwhile, signs of conscientious belt-tightening were everywhere: The
open bars lubricating the proceedings were longer on beers and wines and
shorter on premium liquor. Two of the five exchange CEOs flew coach
across the country. But if the muted mood was noticeable, so was a stoic
optimism -- perhaps because option pros are famously contrarian and many
believe the good times can't roll until the bad times have had their
day.
From WSJ:
Paul Richards
------------
OPTIONS CONFERENCE CONFRONTS ANXIETY OVER INDUSTRY CHANGES
By KOPIN TAN
DOW JONES NEWSWIRES
PALM SPRINGS, Calif. -- The U.S.- listed options industry turns 30 in
April 2003, but it is already in the throes of a midlife crisis.
Nowhere is that anxiety over identity and values more apparent than at
the annual Options Industry Conference this past weekend here, where
shrinking profit margins and a trading slump accomplished what just one
year ago would seem unthinkable: moved golf down on the list of
attendees' priorities. Instead, 377 industry professionals and guests
gathered to confront the mounting changes affecting everything from
market structure to the way options are traded.
"Over the past year, the velocity of change has caught us all by
surprise," said Kevin Murphy, a Salomon Smith Barney managing director.
"If there is a theme this year, it is 'challenge.' "
The status quo came under attack. Some brokerage firms let it be known
none too subtly that they intend to compete with floor specialists and
market makers -- the traditional liquidity providers -- for the right to
fill customers' option orders.
Exchanges came under pressure to provide more than just a venue where
investors meet to trade. "With exchanges, the question is what added
value do they bring?" said David Krell, chief executive of the fully
electronic International Securities Exchange, which did away with manual
processing and sped up order execution.
New terms were coined. Some panelists raised eyebrows when they referred
to "If then" orders, thereby outing a practice that has gone
unmentioned. Brokers who want to trade against their own customers must
expose these orders to other traders who can match or improve prices,
but floor traders say such orders increasingly aren't exposed but
dangled as a hypothetical; they are so named because a floor broker
might ask, "If I have an order ... then what portion of that can I get
to fill?" This lets the broker test the waters from market to market to
find not just the best price for its customer, but also the most
compliant floor traders willing to share the filling of the order.
Meanwhile, signs of conscientious belt-tightening were everywhere: The
open bars lubricating the proceedings were longer on beers and wines and
shorter on premium liquor. Two of the five exchange CEOs flew coach
across the country. But if the muted mood was noticeable, so was a stoic
optimism -- perhaps because option pros are famously contrarian and many
believe the good times can't roll until the bad times have had their
day.
Don, thanks for this artice.
I like the comment about the "If then" orders. I had a friend go down to the CBOE a few years ago and he told a story about how things work at the CBOE. A good order came into the pit to buy some calls and he stepped in front of the DPM, selling them all a tick better than the DPM. After that day, no one in the pit would "share" their orders with him, and he was constantly ignored/shut out.
He had to move to another post to get any fills.
This is what I mean when I refer to the hand holding at the CBOE and other Exchange floors. All 20 guys in a square, just happen to have the same bids/asks for all the contracts. IMO, this collusion is just as bad as the collusion that went on between Exchanges when they agred not to multi list the options in the 80's and 90's.
this kind of collusion is common. I believe the same sort of thing happens in the futures markets. I don't think you are allowed to cross orders (trade against your client orders) so you find a buddy and make an arrangement that you do all my orders and I'll do all of your orders.
The ISE has the best model which forces competition. They have the tightest spreads because there is NO collusion. The ISE has a designated PMM for evey option and several CMM's constantly making markets. These PMM's and CMM's operate independently of each other. If you ever watch the quote you will notice that only one side of the best market can move per change in the stock price and it constatly does because in many cases the market maker on the bid is not the same market maker on the ask. These market makers are running different vols in their auto quote systems and they are physically in different locations which forces a competitive environment.
Some Exchanges claim to have systems that allow independent traders to compete against market makers but this competition doesn't really exist. These independent market makers don't have access to auto-x systems and they find that if they ever want to trade against the respective customer order book then they are shut out similar to traders off the floor.
A few months back the PHLX imposed a rule that forced their market makers to verbally inform Exchange officials when they are trading against the customer order book. This was because anytime the independent trader approached the square to trade against a customer order the market maker would simply say, "too late, we just filled the order."
It's not easy for one person to fight an Exchange (going to the justice department). Put yourself in that guys shoes. And in a way, as he learned, he was better off colluding with all the other traders at a different post than complaining to anyone.
Ask yourself this. Why has it taken so long to for this Wall Street analyst scandal to come out?? This has been going on for years and no one said anything and everyone knew about it.
which reminds me of a saying I once heard,
It's easier and safer to steal with a pen than it is with a gun............
The ISE has the best model which forces competition. They have the tightest spreads because there is NO collusion. The ISE has a designated PMM for evey option and several CMM's constantly making markets. These PMM's and CMM's operate independently of each other. If you ever watch the quote you will notice that only one side of the best market can move per change in the stock price and it constatly does because in many cases the market maker on the bid is not the same market maker on the ask. These market makers are running different vols in their auto quote systems and they are physically in different locations which forces a competitive environment.
Some Exchanges claim to have systems that allow independent traders to compete against market makers but this competition doesn't really exist. These independent market makers don't have access to auto-x systems and they find that if they ever want to trade against the respective customer order book then they are shut out similar to traders off the floor.
A few months back the PHLX imposed a rule that forced their market makers to verbally inform Exchange officials when they are trading against the customer order book. This was because anytime the independent trader approached the square to trade against a customer order the market maker would simply say, "too late, we just filled the order."
It's not easy for one person to fight an Exchange (going to the justice department). Put yourself in that guys shoes. And in a way, as he learned, he was better off colluding with all the other traders at a different post than complaining to anyone.
Ask yourself this. Why has it taken so long to for this Wall Street analyst scandal to come out?? This has been going on for years and no one said anything and everyone knew about it.
which reminds me of a saying I once heard,
It's easier and safer to steal with a pen than it is with a gun............
I just want everyone to know that I am not taking any sides (floor traders vs. firms vs. exchanges, ISE, etc.)...I am just posting what I think is pertinent info for anyone trading.
I, too, had some bizarre experiences when first on the Options Floor in 1979. My beginnings were a bit rough, since I had to "pay for" the fact that my brother had already caused quite a stir on the floor 6 months prior to my arrival...."Oh, hey, Bob Bright't brother...whaddya think you're doing in MY pit..." etc. etc. I took a while to gain what has the appearance of "acceptance" on the floor.
Bettering markets was done only if you were able to "absorb" large quantities of options and many insults at times. We quoted spreads a lot, and would have to give 500 and up sizes (50,000 shares worth), just to be able to participate.
Anyway, before I digress too much, I think it will be very interesting to see how all the changes pan out over the next few months.
Don
I, too, had some bizarre experiences when first on the Options Floor in 1979. My beginnings were a bit rough, since I had to "pay for" the fact that my brother had already caused quite a stir on the floor 6 months prior to my arrival...."Oh, hey, Bob Bright't brother...whaddya think you're doing in MY pit..." etc. etc. I took a while to gain what has the appearance of "acceptance" on the floor.
Bettering markets was done only if you were able to "absorb" large quantities of options and many insults at times. We quoted spreads a lot, and would have to give 500 and up sizes (50,000 shares worth), just to be able to participate.
Anyway, before I digress too much, I think it will be very interesting to see how all the changes pan out over the next few months.
Don