Options on futures

[jessie]

While they may not be the majority of paper, they get handled that way in the pit by arbs & MM's, spread against each other, across traders, etc. No doubt there will come a time when that isn't necessary, or can be done electronically, but the ability to do it now adds significantly to the liquidity and ability to make markets in the pits I trade at the CBOT at least.
Jessie

 

[vega]

Def,

I think one of the things that may skew volume numbers is that although the majority of orders are not that complex, it always seemed like there would be two or three huge orders a day (usually crossed by a broker for two "customers") that would account for a large part of the daily volume, and these orders were generally involving 2,3, or 4 options, call spreads, butterflies, condors, 1*2 ratios, rolls, etc..

 

[def]

Quote from vega:

Def,

I think one of the things that may skew volume numbers is that although the majority of orders are not that complex, it always seemed like there would be two or three huge orders a day (usually crossed by a broker for two "customers") that would account for a large part of the daily volume, and these orders were generally involving 2,3, or 4 options, call spreads, butterflies, condors, 1*2 ratios, rolls, etc..

True and those orders will always be shopped around upstairs and thus can be easily crossed or blocked via many of the exchange platforms. I can't speak for the CBOT but in Asia where the platforms are electronic, we are getting calls all day from brokers looking for markets or size for such order types. Once a price is met, they cross it on the electronic platforms.

 

[vega]

When I was in the NDX and SPX pits at the CBOE, it was pretty much at the point that if an order actually made it down to the floor, either it was a small retail order, or it sucked !! Everything was already shopped around, and the only reason that they even quoted it in the pit was to be legal, and perhaps to prove to both parties upstairs that the price was legit, if we were really lucky, we may have even been able to get on the ticket and trading for 0 edge !

Vega

 

[def]

Quote from vega:

When I was in the NDX and SPX pits at the CBOE, it was pretty much at the point that if an order actually made it down to the floor, either it was a small retail order, or it sucked !! Everything was already shopped around, and the only reason that they even quoted it in the pit was to be legal, and perhaps to prove to both parties upstairs that the price was legit, if we were really lucky, we may have even been able to get on the ticket and trading for 0 edge !

Vega

I should add that some exchanges are pretty good at making sure such orders are done in accordance to the rules and that the market place has a shot at 50% of them for a few seconds (australia for instance has done a nice job), others however don't seem to care as long as there is volume and only come knocking on market makers doors when they want us to promote a new product by providing tight markets and liquidity.

 

[vega]

I should add that some exchanges are pretty good at making sure such orders are done in accordance to the rules and that the market place has a shot at 50% of them for a few seconds (australia for instance has done a nice job), others however don't seem to care as long as there is volume and only come knocking on market makers doors when they want us to promote a new product by providing tight markets and liquidity.

When you said that the MM have a shot at them for a few seconds, it reminded me of a funny little trick the brokers used to/still do use. They would quote some 4-legged spread with an abnormal ratio -- like buying 247 June calls, 178 AUG puts, 79 Dec calls, and 122 Dec puts, and two seconds later say "I'm 5.70 bid, at 5.70, crossed !!!" It was funny that they tried to pretend that in the two seconds after they "original" quoted it they had called a customer, got his market and crossed it before anyone in the pit had figured out the market on the spread !! Ahhhh, the good ol' days !!

Vega