Options execution difference between brokers

dragonman · Oct 22, 2011

Hi, if two different brokers (say, MB Trading and Lightspeed) clear their options trades through the same clearing firm (say, Penson) should there be any difference in the execution results? Or since they use the same clearing firm all of the orders should be routed the same way and there should not be any difference in execution? I refer specifically to options spread orders and not single orders.

Another question -- if the same option spread limit order is sent by different brokers (that do not use the same clearing firm) to the same exchange (say, ISE), should there be any difference in execution (i.e., better price at one broker than the another)? Or since the order just sits on the exchange's servers at this stage then the execution results depend on the exchange and the market makers and not on the brokers anymore?

dragonman · Oct 22, 2011

I have an additional question: if there is a broker that is a member of different options exchanges (such as optionXpress) and there is a broker that is not a member of any exchange (so that it is only a member of SIPC and FINRA) how should that affect the options execution results between these two brokers, if at all?

rwk · Oct 22, 2011

Order routing, execution, and clearing are different processes and one should not affect the other.

Exchange membership can affect the broker's cost, which might determine the commission you pay, but should not affect execution.

The main differences between brokers are the software platform and service they provide when something goes wrong. I'm less sure about order routing, but that could also be a factor.

ASE1245 · Oct 22, 2011

The clearance firm has nothing to do with the execution. As long as your broker is not holding your order in their system with a smart router, and you have DMA to an options exchange, the type of execution you get will depend upon where you send it.

SEC mandates best execution. That means no crossed market, no trade through. If you bidding 1.05, another exchange can not print trades at 1.04 without clearing your order first. But, your option can trade all day at 1.05 on another exchange and you do nothing. If can trade at 1.05 and there can be orders ahead of you. It can also trade at your price with either a complex order or an order tied to stock, and you do nothing. In stocks that don't move a lot, or where the option you choose to bid or offer for has a low delta, picking the exchange that gets the most customer order flow gives you the best chance of buying on the bid and the option still be bid after. To me that's a good execution.

Demand DMA access from your platform and take to time to learn about the different exchanges, there are a lot now. You can check out http://www.theocc.com/webapps/volume-query and see which exchange gets the most volume and customer volume for each option.

dragonman · Oct 23, 2011

Quote from ASE1245:

The clearance firm has nothing to do with the execution. As long as your broker is not holding your order in their system with a smart router, and you have DMA to an options exchange, the type of execution you get will depend upon where you send it.

SEC mandates best execution. That means no crossed market, no trade through. If you bidding 1.05, another exchange can not print trades at 1.04 without clearing your order first. But, your option can trade all day at 1.05 on another exchange and you do nothing. If can trade at 1.05 and there can be orders ahead of you. It can also trade at your price with either a complex order or an order tied to stock, and you do nothing. In stocks that don't move a lot, or where the option you choose to bid or offer for has a low delta, picking the exchange that gets the most customer order flow gives you the best chance of buying on the bid and the option still be bid after. To me that's a good execution.

Demand DMA access from your platform and take to time to learn about the different exchanges, there are a lot now. You can check out http://www.theocc.com/webapps/volume-query and see which exchange gets the most volume and customer volume for each option.

Is there any difference in the execution process that you described between single orders and complex order? I am interested mainly in spread orders.

Also, if a certain broker is an exchange member and another broker is not a member, can the membership give the first broker any priority or other advantages regarding orders execution in that exchange (again, I refer specifically to spread orders, not to single orders). Thanks.

ASE1245 · Oct 23, 2011

Quote from dragonman:

Is there any difference in the execution process that you described between single orders and complex order? I am interested mainly in spread orders.

Also, if a certain broker is an exchange member and another broker is not a member, can the membership give the first broker any priority or other advantages regarding orders execution in that exchange (again, I refer specifically to spread orders, not to single orders). Thanks.

Most complex orders are routed to either the CBOE or ISE. On both exchanges customers have priority over members, so they go in front. The exception might be directed order flow which might entitle the firm routing the order or the DMM a match. So, no...not really. If you bidding or offering in the middle, go where the order cost you the least. If you going along with the markets and hoping to get an execution near the bid or offer of a spread market, you want to be where the order flow is.

dragonman · Oct 23, 2011

Quote from ASE1245:

Most complex orders are routed to either the CBOE or ISE. On both exchanges customers have priority over members, so they go in front. The exception might be directed order flow which might entitle the firm routing the order or the DMM a match. So, no...not really. If you bidding or offering in the middle, go where the order cost you the least. If you going along with the markets and hoping to get an execution near the bid or offer of a spread market, you want to be where the order flow is.

Can you please calrify the exception in which there could be such priority to the broker? Does it relates to brokers who get payment for order flow from the exchange and therefore also get priority in execution? Or is it something else?

Also, you stated "hoping to get an execution near the bid" -- do you mean that I may be able to buy at the bid (not sell at the bid)? I didn't thought it is possible for a public customer, but if this is true I am happy to hear that. In addition, if I understood you correctly, I assume that this may be possible mainly where the order flow is since there could be other customer's orders to sell at the bid, and when I, as a customer, have an order to buy at the bid I will have priority over market makers and thus may be able to buy at the bid -- please correct me if I am wrong.

ASE1245 · Oct 23, 2011

It's my understanding customer orders take priority over market makers. That's why they don't want you on both sides of the market as a customer. To buy a head of you, they have to pay a higher price.

I left the floor in 2010, and don't know all the rules for directed order flow. Before, if a firm like Timber Hill directed a customer order to the Amex, they were guaranteed 40% of the trade if they wish to participate, even if the current bid or offer where it will trade is a customer.

dragonman · Oct 23, 2011

Quote from ASE1245:

It's my understanding customer orders take priority over market makers. That's why they don't want you on both sides of the market as a customer. To buy a head of you, they have to pay a higher price.

I left the floor in 2010, and don't know all the rules for directed order flow. Before, if a firm like Timber Hill directed a customer order to the Amex, they were guaranteed 40% of the trade if they wish to participate, even if the current bid or offer where it will trade is a customer.

So in the situation that you described the customer could actually buy at the bid?

Also, what could give Timber Hill (or any other broker for that matter) such priority?

ASE1245 · Oct 23, 2011

Quote from dragonman:

So in the situation that you described the customer could actually buy at the bid?

Also, what could give Timber Hill (or any other broker for that matter) such priority?

I honestly don't remember if the firm gets a match with the public, but the exchanges used to have specialist and DMM (designated market maker). Then payment for order flow started to direct orders to an exchange. Then, the idea of directed order flow started to heat up competition. Any member of the exchange, can make a deal with an order flow provider to direct their order flow to the exchange, and be their DMM for their orders. They are also responsible for the payments for order flow. The exchanges allow that party 40% of the flow for directing it to that exchange. On the Amex, besides the specialists, GS, Timber Hill and Barclays receive their own directed orders and sometimes make deals with other firms.