Option Routing (Market Makers)

A

AlphaLine

Can anyone give me some insight on routing and market makers?

I am using TOS (ThinkorSwim) and submitted a multi leg contract that has a limit order on it using SPX which has gone unfilled despite the order meeting the limit (I also tried the same order on SPY with the same results, although the system accepted a single buy call order).

The order was accepted by TOS, e.g. meets margin requirements, strikes are fine, DTE is ok.

I have traded this on demo accounts with no problem but the order will not fill on a live account. (I have not checked with TOS yet).

I presume that when an order is placed with a broker, then they route that order to the market makers, I presume there are different routes that TOS can use. Does the MM see the order as submitted (e.g. a vertical) or do they see the orders come in as separate positions? In other words, I am wondering if a MM would have the right to reject my order. Thanks for any input!
 
If the option has a bid/ask price, and you try to sell or buy at the bid/ask price, then simply put, you should get filled at that price. Is it possible that you're trying to sell at the ask price or buy at the bid price? Irregardless of how they route orders, the prices that are quoted should be fulfilled at their respective bid/ask prices. Every regulated broker has to operate like this.
 
When you submit a complex order (spread) with TOS in the SPX they will route it directly to the CBOE's COB (complex order book), if it is under a certain quantity. If it is a larger order, it will be routed to a broker in the pit, and he will attempt to trade it in the pit (he will also have the option to place it in the COB). Either way your order is viewed in total, as a spread. The SPX is only traded at the CBOE.

The COB is visible to Market Makers and customers. Market Makers constantly scan the COB, and if your order is marketable, it will be filled here electronically.

My guess is your order did not give up any "edge" and that is why it was not filled.

You can actually view the COB yourself and check if you see your order here,
http://www.cboe.com/cob/
 
Thank you both for your valuable insights.

I watched the prices and the limit order was right there. I will take a look at the COB and see if it is there.
 
AlphaLine said:
Can anyone give me some insight on routing and market makers?

I am using TOS (ThinkorSwim) and submitted a multi leg contract that has a limit order on it using SPX which has gone unfilled despite the order meeting the limit (I also tried the same order on SPY with the same results, although the system accepted a single buy call order).

The order was accepted by TOS, e.g. meets margin requirements, strikes are fine, DTE is ok.

I have traded this on demo accounts with no problem but the order will not fill on a live account. (I have not checked with TOS yet).

I presume that when an order is placed with a broker, then they route that order to the market makers, I presume there are different routes that TOS can use. Does the MM see the order as submitted (e.g. a vertical) or do they see the orders come in as separate positions? In other words, I am wondering if a MM would have the right to reject my order. Thanks for any input!
More...

What do you mean by "the order meeting the limit."
Can you give us a live example if you do it later? The spread, price and time entered. Then we can each see live the issue, if there is one.
 
FSU said:
My guess is your order did not give up any "edge" and that is why it was not filled.
More...

Depends especially on the expiry. In a quiet market (Oct20, or any Monday or Wednesday book), your order can sit there Limit=Mid alllllll day long. You either give up some edge, or you find a market with people in a greater hurry.
 
What do you mean by "the order meeting the limit."
Can you give us a live example if you do it later? The spread, price and time entered. Then we can each see live the issue, if there is one.

Thanks for the response Robert. When I was watching the quotes, my order was sitting at 4.90 on the bid and the quote was at 5.00. I cancelled that order and resubmitted at the same bid (4.90) and this was filled immediately. There might be something awry with the platform as I have seen orders disappear as well.

Thanks tom for the insight, I submitted a new order with a Friday expiration, I will see how that goes. Do you think that a bid that is .20 off the natural is reasonable? Example: 4.90 and a 5.10 bid. This would be on SPX w/ 10dte with strikes near ATM.

I did not have a problem with these fills on a demo, but I am sure that live fills are different.
 
Quick question -- Are bids / asks FIFO? They're supposed to be FIFO, right? I've seen situations in the past where I felt my order wasn't FIFO and it was upsetting, but I've always been under the assumption that if there is nothing sitting at hypothetical .35 bid and I'm the first order there, I should get hit first when someone wants to sell at market and I'm the best price.

Example:

No bids on the book at .35. I place a limit bid at .35 for 100. Someone then places another limit bid at .35 for 500. Someone eventually wants to sell at .35 for 500. My 100 should go out first right? Even if it means a partial fill for the second bidder?
 
AlphaLine said:
When I was watching the quotes, my order was sitting at 4.90 on the bid and the quote was at 5.00. I cancelled that order and resubmitted at the same bid (4.90) and this was filled immediately. There might be something awry with the platform as I have seen orders disappear as well.
More...

Your terminology is confusing me a little and I'm not sure where you are getting the BID from. If you are talking about the single legs adding up to a 5.00 debit and you can't sell it at a $5.00 credit, that might include a 1 lot that the MM don't want to match. You can quick try and leg the spread yourself to get a $5 credit, but you will be at the risk of the market.

Next time this happens, try a screenshot live and post it.
 
aphexcoil said:
Quick question -- Are bids / asks FIFO? They're supposed to be FIFO, right? I've seen situations in the past where I felt my order wasn't FIFO and it was upsetting, but I've always been under the assumption that if there is nothing sitting at hypothetical .35 bid and I'm the first order there, I should get hit first when someone wants to sell at market and I'm the best price.

Example:

No bids on the book at .35. I place a limit bid at .35 for 100. Someone then places another limit bid at .35 for 500. Someone eventually wants to sell at .35 for 500. My 100 should go out first right? Even if it means a partial fill for the second bidder?
More...

Execution rules on options vary from exchange to exchange. In general, customer take priority to any broker dealers but some exchanges might allow the Designated Primary Market-Maker" or "DPM" be guaranteed a percentage of the volume for directing the order to that exchange. There are also 15 option exchanges. You are not protected from executions on other exchanges at the same or better price.
 
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