'Teasing' Bids/Asks to narrow a spread by submitting/cancelling orders - what's this pattern called?

[tommcginnis]

Yeah, that was my assumption as well...that they just want to be at the front of the queue...

Not necessarily at all.
As you watch the B/A spread and quantity-offered(s), you'll see behavior that I liken to Halloween kids lined up on a stoop: little kids might all rush forward, sacks opened, yelling "Trick-or-treattttttt!" and gleefully accepting whatever sugars are handed out. The bigger kids though -- they hang back a bit, mindful of a certain capacity limit in their candy sack, mindful that sugar is just *dang* heavy to carry around, mindful that those puffy little treats like 'flavored' dots and Sweet-Tarts and such just do *not* do the joy so much..... These bigger kids are waiting for the houses that are handing out Snickers and Hershey bars and Chunkies (are CHunkies even made anymore??). Keep watching the quantity(s), and you'll see a 'block-of-size' before-which can sometimes hop smaller offers... but the big boys (and girls?!?) have a definite idea of where they wish to trade, and move with the underlying, and not so much with the option/strikes.

(BTW, 'economically' this is an auction, and the observations you're making right now apply equally well to markets in art, tomatoes, tax/property(s), wholesale cars, etc etc etc. As much as possible, the big boys will let the little fishies scramble for the tidbits (and exhaust themselves), knowing that "Of Size" needs to be around for the long run. Hell, just watch a closing eBay auction! [With a beer in hand, thinking "Don'tcha just love this stuff?!?"])

 

[ironchef]

Teasing does not work for me. However, this does:

After some coaching from MrScalper, I now trade with charts and depending on the direction of the underlying and how rapidly it is moving I can get a little more profits from my transactions than scalping the mid of bid/ask.

 

[Rhiinoo]

Teasing does not work for me. However, this does:

After some coaching from MrScalper, I now trade with charts and depending on the direction of the underlying and how rapidly it is moving I can get a little more profits from my transactions than scalping the mid of bid/ask.

I'm confused about what you're saying "works" for you...seems like you're just saying you "use charts"(?) Did you leave out part of your post / forget to quote something you meant to?

Not necessarily at all.
As you watch the B/A spread and quantity-offered(s), you'll see behavior that I liken to Halloween kids lined up on a stoop: little kids might all rush forward, sacks opened, yelling "Trick-or-treattttttt!" and gleefully accepting whatever sugars are handed out. The bigger kids though -- they hang back a bit, mindful of a certain capacity limit in their candy sack, mindful that sugar is just *dang* heavy to carry around, mindful that those puffy little treats like 'flavored' dots and Sweet-Tarts and such just do *not* do the joy so much..... These bigger kids are waiting for the houses that are handing out Snickers and Hershey bars and Chunkies (are CHunkies even made anymore??). Keep watching the quantity(s), and you'll see a 'block-of-size' before-which can sometimes hop smaller offers... but the big boys (and girls?!?) have a definite idea of where they wish to trade, and move with the underlying, and not so much with the option/strikes.

I'm...not sure how well I'm following your candy analogy, but if you're suggesting that all of the MM bid/ask $0.05 teasing is just automated small-potatoes 'noise', then yes I think I follow...as I wrote, I don't think there's much of an advantage to be gained from it, other than giving a hint as to a MM's actual best bid/offer. Seems like you're suggesting watching for something that I also have indicators for: order-sizes that appear to indicate purposeful (likely manually-inputted) orders that the submitter wants(/needs?) to get filled. I usually look for one of:

(i) even order size #'s (e.g. 500, 100, 475)
(ii) order sizes noticeably out of whack with the lion's share of the other contract sizes (e.g. 125, when every other Bid or Ask size in the series is 10 or 20.
(iii) relatively large orders that don't change in price, despite significant movement in the underlying, suggesting a static order that a trader input but may not be actively monitoring.​

If you were suggesting something different, or think I'm missing a more fundamental take-away from your analogy, by all means let me know Thanks!

 

[ironchef]

I'm confused about what you're saying "works" for you...seems like you're just saying you "use charts"(?) Did you leave out part of your post / forget to quote something you meant to?

Teasing did not get me any better price than doing normal selling/buying of walking up/down the limit price.

However, if I timed my buy/sell using charts of the underlying as a guide, I made more money.

 

[trader42]

I'm guessing this is just part of the market maker algorithm, but it's so reliably repeatable I'm just wondering whether it's well-known / what it's called.

Would this be considered "algo baiting"?

http://www.zerohedge.com/news/2017-11-22/uk-trader-fined-60000-pounds-outsmarting-algorithms

 

[vanzandt]

What if you made it a market order? That is their hope.

Bob... this is kind of along the same lines and I've been meaning to ask you about it.
Say the bid/ask is 100@$.75 by 125@$1.10 and I put in limit order to buy 10 contracts at .90

Lots of times I'll see (some) volume come along with me.... it might show instead of solely my 10 at .90... it might show 30 at .90. Then when I cancel my order... the 20 at .90 stays...and then a few seconds later it goes away. Or sometimes it just stays completely. Assume the underlying didn't budge. Whats going on here?

Re market orders....I've noticed that sometimes I get a better price (both buying and selling) with a market order between tight spreads when the contracts trade in increments of a dime or a nickle. I might get a fill (or sell) in between the .05 or .10 cent increments.

Example: say I want to buy at $1.90 and the ask is $1.95 I can put in a limit order for $1.90 and not get filled so my only other choice is a limit order at $1.95 which will get filled at $1.95. But if I put in a market order I might get filled at $1.92. This adds up when you're buying/selling like 50 contracts.

 

[ajacobson]

The great as yet unanswered question - single list or multiple list? If this is a multiply-listed option you are "most" probably exposing preferenced/hidden liquidity. When you are joining the preferenced/hidden liquidity it shows so the MM can join. Complicated and stupid and the SEC should not have allowed it.
Essentially on some exchanges the MM works a routing deal with a firm. They then do what is a preferenced order. The market is $1.80 - $2.00, but I'll fill your order at the midpoint - but I won't expose my better market to be hit by other participants. As long as it doesn't violate NBBO, but improves it - it is OK.
Think of it as a listed dark poll, but only for preferenced orders.

 

[FSU]

Bob... this is kind of along the same lines and I've been meaning to ask you about it.
Say the bid/ask is 100@$.75 by 125@$1.10 and I put in limit order to buy 10 contracts at .90

Lots of times I'll see (some) volume come along with me.... it might show instead of solely my 10 at .90... it might show 30 at .90. Then when I cancel my order... the 20 at .90 stays...and then a few seconds later it goes away. Or sometimes it just stays completely. Assume the underlying didn't budge. Whats going on here?
.

Many market makers will have a joining/matching program when they quote. I did as well when I was quoting electronically. In a stock without much volume, they will leave their quotes fairly wide. No real advantage to making a tighter quote as they may be joined. Keep a wide quote and when a customer order comes in, they will match it as long as it is in their parameters. Their quotes can also be set to match a customer only order, so when the customer cancels and it is only other MM's quotes, they will go back to their original wide quotes.

When an order comes in, it will go to the exchanges auction system, so the MM, even when quoting a wide market can fill the order at a much better price. This is why it really matters what exchange the order goes to. The main exchanges may have more MM's quoting and provide a better price improvement over some of the smaller exchanges. Of course some other exchanges may pay a liquidity provider fee, which will incentivize orders being sent there.

 

[ironchef]

Their quotes can also be set to match a customer only order, so when the customer cancels and it is only other MM's quotes, they will go back to their original wide quotes.

Yes I noticed that quite often.