OptEX - Option and Equity traders...
- Thread starter Don Bright
- Start date
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tell me about you algorithm and i'll tell you ours....
seriously. how many times can i say i'm not the programmer behind this. it is proprietary. however, i'll take a stab at it, repeat this is just a guess:
a: if TMBR is best or better NBBO on ISE then route there as it will be auto filled. (for exception see y)
b: now that phlx has a plan for real auto fills- see A
c: if tmbr is not primary market maker - keep track of which bins on the ISE honor their quotes, give them priority.
d: ditto for firms that join the phlx plan or other exchanges that do the same,
e: if none of the above, if exchange has autoEx flagged, send an order and pray the autoex is really on
....
.....
y: if Metoxx is behind the order, route anywhere but TMBR as it is the flow is too hot to handle
z: avoid AMEX if possible
(just kidding about z, not sure about y
).
seriously. how many times can i say i'm not the programmer behind this. it is proprietary. however, i'll take a stab at it, repeat this is just a guess:
a: if TMBR is best or better NBBO on ISE then route there as it will be auto filled. (for exception see y)
b: now that phlx has a plan for real auto fills- see A
c: if tmbr is not primary market maker - keep track of which bins on the ISE honor their quotes, give them priority.
d: ditto for firms that join the phlx plan or other exchanges that do the same,
e: if none of the above, if exchange has autoEx flagged, send an order and pray the autoex is really on
....
.....
y: if Metoxx is behind the order, route anywhere but TMBR as it is the flow is too hot to handle
z: avoid AMEX if possible
(just kidding about z, not sure about y
).Here is an example of my concerns about the "in house" trading examples.. (Much longer article, but this is the beginning)...
NEW YORK (Dow Jones)--It is an example of what can go wrong when brokerage firms push hard to "internalize," or trade against their own customers.
The Chicago Board Options Exchange has taken disciplinary action against Credit Suisse First Boston, in essence for a violation of exchange rules in failing to exercise due diligence in handling a customer order.
The sanctions meted out follow an investigation by the exchange's business conduct committee and includes a $75,000 fine, restitution of $30,000 to the CSFB customer in question, a "disgorgement" of about $5,250 in commissions and a censure. CSFB also undertook to send certain traders to an educational session and to submit an options compliance manual.
So what happened? On May 22, 2001, a CSFB trader was trying to execute, on behalf of a customer, a "ratio call spread" in the popular options of the Nasdaq 100 Tracking Stock, or QQQ (specifically to sell 3,000 June 49 calls and buy 4,000 June 52 calls).
Exchange rules require brokerage firms that want to trade against their own customers - an increasingly common practice in the option industry - to expose that order to the trading floor, so other market makers have a chance to match or improve prices offered by the brokerage.
In this instance, CSFB wanted to fill part of the order for a net price of $2.90. When it requested a price from the CBOE's floor traders, the QQQ trading crowd went one better and offered the customer a net credit price of $3. Instead of accepting that better price, CSFB allowed the order to trade at the Philadelphia Stock Exchange, where it fetched a net credit price of $2.90 and where the broker was allowed to fill a portion of that order. As a result, the customer received a less favorable price - to the tune of $30,000.
NEW YORK (Dow Jones)--It is an example of what can go wrong when brokerage firms push hard to "internalize," or trade against their own customers.
The Chicago Board Options Exchange has taken disciplinary action against Credit Suisse First Boston, in essence for a violation of exchange rules in failing to exercise due diligence in handling a customer order.
The sanctions meted out follow an investigation by the exchange's business conduct committee and includes a $75,000 fine, restitution of $30,000 to the CSFB customer in question, a "disgorgement" of about $5,250 in commissions and a censure. CSFB also undertook to send certain traders to an educational session and to submit an options compliance manual.
So what happened? On May 22, 2001, a CSFB trader was trying to execute, on behalf of a customer, a "ratio call spread" in the popular options of the Nasdaq 100 Tracking Stock, or QQQ (specifically to sell 3,000 June 49 calls and buy 4,000 June 52 calls).
Exchange rules require brokerage firms that want to trade against their own customers - an increasingly common practice in the option industry - to expose that order to the trading floor, so other market makers have a chance to match or improve prices offered by the brokerage.
In this instance, CSFB wanted to fill part of the order for a net price of $2.90. When it requested a price from the CBOE's floor traders, the QQQ trading crowd went one better and offered the customer a net credit price of $3. Instead of accepting that better price, CSFB allowed the order to trade at the Philadelphia Stock Exchange, where it fetched a net credit price of $2.90 and where the broker was allowed to fill a portion of that order. As a result, the customer received a less favorable price - to the tune of $30,000.
that is technically a "trade through" which is not suppose to happen.
With or without OptEx, it happens, guys get caught, etc
With more orders being crossed, the chances are better that these "trade throughs" occur. So, in this sense, it may be a concern but only if guys are not caught - but one should expect them to be caught once the trade through rules are officially in place as each Exchange will have to publish their trade throughs and notify the customers involved. (I'm not sure if trade through rules actually will apply to spread orders)
With or without OptEx, it happens, guys get caught, etc
With more orders being crossed, the chances are better that these "trade throughs" occur. So, in this sense, it may be a concern but only if guys are not caught - but one should expect them to be caught once the trade through rules are officially in place as each Exchange will have to publish their trade throughs and notify the customers involved. (I'm not sure if trade through rules actually will apply to spread orders)
I think you caught my concern at the end of your note..."quoted spreads" are not necessarily "trade throughs" - and hard to "track down." Going back a long time, we would be concerned whenver a firm would "quote" and "re-quote" a spread over and over...and realized that they were simply waiting for some of us to be out of the crowd so they could cross it. We would have to leave orders with floor brokers if we went to the restroom. And then they would simply do one side at a time.
I hope that we can keep the public's interest by having proper executions.
Don