Safely ITM options > brief underlying spike at 4:00pm = now OTM. What happened? Seems fishy.

D

d0rian

This is the first time I've seen anything like this in 10 years. Just want to know if this could be the product of some kind of malfeasance since it's so unusual.
  • Was long EQX (Canadian option chain, not US) $17 Sept 18 2020 Puts
  • Underlying was trading safely in a narrow range around $16.50 with just seconds until Close on Sept 18, and I shut down for the day.
  • Logged in Monday to find that the Puts had NOT been auto-exercised, despite being (so I thought) safely ITM. This made no sense to me: they'd been trading at $16.60 just seconds before close on Friday, and were trading at around there just after the Monday open. How could they not have been exercised?
  • I checked and found that the EQX Friday Close had been marked at $17.05 (?) Pulled up the IB Time & Sales window, to find the below, which struck me as remarkably fishy:
    • All the trades in the seconds prior to Close were safely below $17.00
    • A ton of shares traded hands at $17.05 at 4:00pm on the dot, which is how the Close got marked at $17.05 I guess?
    • The next trades after that $17.05 iceberg were back down at $16.35, which is where it opened on Monday morning too.
What happened here? I'm guessing that all those shares that traded hands at 4:00:00 were part of some Closing auction process?
I was also, FWIW, under the impression that the Closing price for purposes of option in-vs-out of the money calculations had to be PRIOR to 4pm...i.e. the last trades at 3:59:59?

In any case, has anyone seen anything like this before and know what's going on?

1SGZHJg.jpg
 
Just so you are aware - the rules for MOC orders are changing (in the next couple months).

Lots of BS games are currently played - so they are trying some new things. It will start at 3:50 and there will be a freeze period as well.
 
mskl said:
That sucks. Those were MOC orders. Imbalance info can be found here: (at 3:40 each day)

https://tsx.com/trading/market-data...and-reports/moc-imbalances/tsx-moc-imbalances

fyi: There can be some huge imbalances on the monthly expiry and month ends. That trade at 4 pm is considered the last trade. And if you wanted too - you still could have exercised the puts. Next time - make sure you check the last trades...

good luck
More...

Yes, I'm typically careful about monitoring post-4pm price movements on the underlying when I'm long a near-the-money option...I didn't in this case, because $0.40 seemed so safely ITM; i.e. it would have taken a 3% after-hours spike, which -- while possible -- is highly unlikely on a Friday evening. Had I seen the MOC $17.05 trades, followed by the 4:15pm return to $16.35, I know I could have (and would have) manually exercised the Put.

What are examples of the games you say are currently being played with MOC orders, which the exchange is changing its rules to address?

EDIT: what this episode also made me wonder is whether it would be trivially easy to screw with the mark price for the purpose of screwing around with the reference price that determines whether options expire in-or-out of the money? e.g. if I'm short a massive position of a $17 Put that's trading around $16.50 (like what happened to me in the OP), couldn't I -- depending on the order book -- pass a few trades through at 3:59:59 at $17.01 to make sure my short position gets marked OTM??

Sure, whoever's on the other side holding all those Long puts may see the ruse and manually exercise his Puts if he suspects it was some kind of tape-painting, or if he sees after-hours trading that puts his Long position ITM again...but that's probably a massively +EV, albeit I'm guessing illegal, play that will at the very least screw inattentive traders who rely on their brokerage to auto-exercise ITM options based on the mark price...or is that precisely the kind of BS games you think are currently going on...?
 
Last edited:
thecoder said:
100% fraud!
More...


lol

Ya some guy decided to buy 5 million shares of stock MOC so the 100 contracts of OI would be dust...

you have lots to learn if you think this is fraud. This happens all the time in the US as well.

if dOrian was paying attention he would have seen the buy imbalance and higher reference price - he would have bought the stock at $16.50 ish and then re-sold LOC (any offer <17.05 would have been filled at $17.05) and then he could have re-bought again. This volatility right on the close is beneficial to those who are long atm premium but you have to be paying attention.
 
mskl said:
lol

Ya some guy decided to buy 5 million shares of stock MOC so the 100 contracts of OI would be dust...

you have lots to learn if you think this is fraud. This happens all the time in the US as well.

if dOrian was paying attention he would have seen the buy imbalance and higher reference price - he would have bought the stock at $16.50 ish and then re-sold LOC (any offer <17.05 would have been filled at $17.05) and then he could have re-bought again. This volatility right on the close is beneficial to those who are long atm premium but you have to be paying attention.
More...

Yes, while frustrating, I doubted that it was any targeted attempt to screw me in particular; there was a massive # of shares that traded at $17.05 MOC (I only included about 10% of them in the screenshot in the OP because otherwise the image would have been way too tall)...so my tiny little 10-lot was obviously not top-of-mind for whoever it was trading 7-figures MOC. Still wanted to understand what happened; your replies are helpful -- I've never paid attention to the MOC imbalance numbers.

In my previous reply just above this one, though, I laid out a hypothetical scenario where...an unscrupulous trader with a massive ATM option position could theoretically screw with the Close with a relatively small trade size (unlike the huge MOC trade in this instance) to get a favorable mark price for his option position...is that something that's currently common practice (albeit likely illegal)?
 
d0rian said:
Yes, I'm typically careful about monitoring post-4pm price movements on the underlying when I'm long a near-the-money option...I didn't in this case, because $0.40 seemed so safely ITM; i.e. it would have taken a 3% after-hours spike, which -- while possible -- is highly unlikely on a Friday evening. Had I seen the MOC $17.05 trades, followed by the 4:15pm return to $16.35, I know I could have (and would have) manually exercised the Put.

What are examples of the games you say are currently being played with MOC orders, which the exchange is changing its rules to address?
More...


The TSX has included LOC with MOC orders with respect to market imbalance. So - lets say at 3:39:59 (stock is at 16.50- someone enters an order to buy 5 million shares at 16.51 (LOC)) - it would initially show an imbalance of 5 million shares and the stock would go up more than one penny. The guy could then cancel this order. Plus many would be entering/cancelling orders at the last second. Just watch the imbalance and the moves that happen right at 3:40.

The new rules can be found on the website - and they include a freeze period that randomly starts between 3:56 and 3:57 (no cancelling afterwards: loc/moc).

Just keep an eye and don't be afraid to have limit orders in the book to take advantage of this. This could have been quite good for you.
 
last post on this:

MOC moves are common every day. just look at the link I provided - find the big imbalances and you will see the equity move right at 3:40. On month end/qtr end and some option expirations the moves can be much larger (like this one). Often these expiry related trades on the open/close are simply large trades that are closing transactions (ie: the trade in the equity offsets whatever hedge they have on -could be an otc trade in this case)

When I was on the floor in the 90's - we often moved the market 1-3% as we unwound our Index Arb positions on the friday opening. We needed to do this as the futures were expiring to the cash at the opening settlement. For example - if the specs are all buying index futures - these futures are eventually getting into the hands of the program traders. The program traders end up long stock/short futures. If the specs don't roll that position with you then you simply unwind your equity position creating a massive sell imbalance on expiration. A trader came to me once and blamed me for constantly moving the market against his position. I had to explain to him that he was the one that caused the imbalance. When you use leverage and let things expire then you are creating an expiration move that will go against you (everything else being equal).

Today, these imbalances in the US and Canada are all widely seen thus the moves on the open/close are often quite tame.

there was a time when triple witching meant something.....
 
The weird thing is that TSX doesn’t really have an after hours session. Their is but trades can only happen at the closing price. Theirs no open auction.

Or so I thought....
 
You must log in or register to reply here.
Back
Top