Please support BOX and IB and kick CBOE's ass

[def]

Quote from Trajan:

If we don't think we have some sort edge, than what are we doing trying to make a living at this. The edge MMs had went away in the late nineties; these rules are just a reaction to that. There is currently tight spreads and ample liquidity in the big optionable stocks. MMs and CSs are converging down where the CS is. All these complaints about this fee or that limitation is all crap. I'll reprise some of my earlier thoughts

1. It does cost an exchange to handle your order, maybe not as much as they charge, but servers don't grow on trees. Has anybody really thought about the long term business model of the Box. What you may not understand is that your commissions are subsidised from the payment for order flow that many people complain about. How is the BOX going to sustain itself in this CS nirvanna where they trade for free and MMs carry all the water. They'll have a go at it doing this until either the number of players gets cut in half and they can raise fees for CS or give MMs more edge for underwriting the cash flow.

2. Honoring bids and offers, since this seems to be mostly associated with pick off orders, you guys can go fuck yourselves. Nobody, whether MM, CS or BD, is there to take a bullet for you. Of all the issues with exchange listed options, this is the only one that makes me think less of the people who complain about it. Your basically complaining about not being able to screw somebody else over and then crying when the tables get turned on you while trying to do so.

3. The two sided market thing is BS, but it is their exchange and you could join. PCX seats are going for a mear $14,000 and their volume is the same as five or six years ago. You could make back the cost of membership in just a week.

I've got to go for a few hours, so please flame away in my absence.

trajan, you bring up some interesting points (some of which I even may agree with ) but I've been too busy (look at a HK chart today) to take any time to respond. there is some truth in what you say about the pick off guys but we've made a nice living honoring our quotes and providing liquidity. Every now and then you'll get picked off and yes that sucks. However, the vast majority of orders are not pick-offs. It is just someone, firm or institution that has a different vol, position, viewpoint etc. The BOX is a move towards how options trades in all major global markets ex-US and while it is not a perfect model, I think it's an improvement over what currently exists in the US.

One last thing on cancel fees: Do you really believe the CBOE installed a cancellation fee due to infrastructure costs?

 

[sle]

Quote from Trajan:

In my mind, I think this benefits Timberhill and the quant groups of the world which is why I have Hull and Wilmott books on my shelf plus a shitload of math from the last year(this is for another reason, but it does come in handy).

As a ex-quant and a quant trader, i would like to develop this issue a bit. If you are worried about automated market-making - autmated market making for options is really faar away. Electronic exchage trading will benefit quant finance methods but for a number of different reasons.

 

[def]

Quote from sle:



As a ex-quant and a quant trader, i would like to develop this issue a bit. If you are worried about automated market-making - autmated market making for options is really faar away. Electronic exchage trading will benefit quant finance methods but for a number of different reasons.

Do you really mean that automated market making for options is really far away? If so, you are incorrect. It's been around for years. The degree of automation depends on the exchange platforms but all you need to do is look at ISE, Eurex, and most markets outside the US to see the possibilities.

 

[Trajan]

Quote from sle:



As a ex-quant and a quant trader, i would like to develop this issue a bit. If you are worried about automated market-making - autmated market making for options is really faar away. Electronic exchage trading will benefit quant finance methods but for a number of different reasons.

My view is that spreads are going to be shrinking which leaves me less of a margin for error. I have never been happy with any of the shelf models I've used over the years. None seemed to accurately reflect real markets, a example would be the skew. As of right now, nearly all of my positions are put on for some sort of theoretical edge. As the spread tightens, as is expected on the box, I need to capture what's there, hence find a better model whether my own or somebody else's(I still need to be able to evaluate). I would be perfectly comfortable plugging my numbers into in a program and letting it do my work.

The thing is, I would bet a lot of other people out there who would never go onto a floor to trade are thinking along these similar lines. As exchanges have been moving towards more of the European model, barriers to entry are fading. There have been automated trading programs sending orders from off floor, as in the late 90's Raes bandits. They solved that problem by preventing electronic orders from being placed. This type of stuff will return and be worse with the rules on the BOX. It will be more or less a free for all. When a lot of the markets are efficient 99% of the time, you need to be able to recognize when they aren't and pounce. It won't be dissimilar to the Raes bandits, except this time, theoretical edge will be the gravy.

To sum it up, I think you'll not only need to program, but also have good quantatative skills as well. I could make a ten cent wide market in liquid options now, but there will be less room for error when the spread is only a penny or two. It would be impossible to make a 2 sided market with spread, but I would still need to be somewhere so as to at least get some scraps.

 

[sle]

Quote from def:
The degree of automation depends on the exchange platforms

Right, that's the key phrase. I totally agree that some automation is here and hopefully here to stay, but it still relies on some human judgement, otherwise the exchanges would be taking on risk that would never be covered by the potential gains from MM-ing. The floor trading should go away soon, I hope. In any case, OTC markets is where real interesting stuff is happening.

As for liquid markets - new kinds of inefficiencies will appear, a lot of stuff that used to be adsorbed by judgement of the floor traders will now go outside the BOX

 

[sle]

Quote from Trajan:

I have never been happy with any of the shelf models I've used over the years. None seemed to accurately reflect real markets, a example would be the skew.

Err, for the skew models look at some stochastic parametrisations, like SABR model. It is quite neat and predicts the smile dynamics rather well. I can send you some VBA code + spreadsheet

 

[murray t turtle]

Quote from sail:

Vega,

I've been a MM on two of the floors for several years so I don't consider myself a newbie.

I know MM's get picked off by upstairs firms (with knowledge of where the next few prints will be). That still doesn't justify
not honoring quotes. When goldman comes into the crowd trying to do a 200 lot IOC on
the bid or offer just trade the minimum, fade and overhedge!

===
Vega;
Hope next time you see Bill Brodsky you share some of our honorable quotes concerning honoring quotes.

Actually during the last 20 & ''more '' days CBOE has been'' honoring many quotes'' on index options with good fills-limit & market orders;
with some notable exceptions perhaps on cheap puts.

 

[vega]

I'm sure he'd love to hear what we have to say !!!!!

Vega

 

[TJ.]

Searching
I am currently using IB for call/put options. Are they about the best at this time, or is there someone else I have not heard of?

THANKS