Retail options trading boom a burden for some investing firms -study

[ajacobson]

This is more about payment and protecting NBBO. Very few scale institutions will interact with payment and that decreases the listed choices, but with the exception of spreads, NBBO can't be violated without taking out a resting NBBO and it just becomes cumbersome. Doing it upstairs is easy at times. Equity options done upstairs are not fungible and only SPX qualifies for OCC when done off the floor. There are other complications if a satisfaction order(s) needs to sent. Facilitation on a floor is superior, but as the article points out. It can take too long.

 

[JSOP]

This explanation sounds a little bit odd to me. Are the big firms complaining their order get executed in more chunks rather than a single one, leading to higher commissions (but also to better fill prices)? Moreover, if the retail is really providing liquidity, the market impact of big sized orders should be less not more. Cannot understand. Any kind sould willing to explain that to me?

I think what those professional investment firms are complaining about is the possible announcement effect of their trading activities in that mom-and-pop retail investors are somehow able to deduce about their investment actions and are following their lead and subsequently pushing the price up further when they are buying and pressing the price down when they are selling thus exacerbating the "volatility" and making the professional investment firms not being able to enter or exit the trade at the price that they want. So basically they are the big ships that are complaining that a bunch of surfers on their surfboards are creating too much waves in the sea because they are riding on the very waves created by the big ships themselves and now them being the big ships are not able to sail smoothly because the sea is too rough. LOL

No, it's total utter BS. It's not the retail investors' problems that they can't execute orders. They are supposed to be the professionals and if they can't even execute their orders right then perhaps it's a mistake for investors to park their money with these professional investment firms and should invest with those mom-and-pop retail investors instead.

 

[JSOP]

This is more about payment and protecting NBBO. Very few scale institutions will interact with payment and that decreases the listed choices, but with the exception of spreads, NBBO can't be violated without taking out a resting NBBO and it just becomes cumbersome. Doing it upstairs is easy at times. Equity options done upstairs are not fungible and only SPX qualifies for OCC when done off the floor. There are other complications if a satisfaction order(s) needs to sent. Facilitation on a floor is superior, but as the article points out. It can take too long.

All the more reason for the retail investors' orders to be sent directly to the individual exchanges instead of to market makers who paid for the orders.

 

[arturo100]

I think what those professional investment firms are complaining about is the possible announcement effect of their trading activities in that mom-and-pop retail investors are somehow able to deduce about their investment actions and are following their lead and subsequently pushing the price up further when they are buying and pressing the price down when they are selling thus exacerbating the "volatility" and making the professional investment firms not being able to enter or exit the trade at the price that they want. So basically they are the big ships that are complaining that a bunch of surfers on their surfboards are creating too much waves in the sea because they are riding on the very waves created by the big ships themselves and now them being the big ships are not able to sail smoothly because the sea is too rough. LOL

No, it's total utter BS. It's not the retail investors' problems that they can't execute orders. They are supposed to be the professionals and if they can't even execute their orders right then perhaps it's a mistake for investors to park their money with these professional investment firms and should invest with those mom-and-pop retail investors instead.

Many times we spot these big trades only afterwards and therefore they should be only happy that someone saw them and it is trading in their same direction. I mean, there are newsletters that make a living out of "pump and dump" strategies and this situation might well be very similar. Sometimes even large Institution announce that they started the covering on a given stock. And I bet you that they announce it only after they have completed their transaction.
However, now that I think more of it, a possible explanation would be that sometimes large institutions shop their activity upstairs. This means that probably they get better fills than retails. As I always try to follow smart money, a few times I was myself in the middle of this situation. I had successfully followed along a big sized trade, I was looking to close the trade and I got a better price than expected, when the Institution decided to close its own trade. But, whereas the Institution order was in the thousands, mine was negligible and I can hardly see how it was bothering them. Probably the Market Maker didn't even notice me!