Two Sided Retail Market Making for Options

C

CashDelivery

So I saw some things in the market and was able to reconcile one of my old NY4 strategies to retail. Not even using a computer algo, doing it by hand! To my dismay, I find if I try to make markets on options I get an error from my broker: "Order Reject: This account cannot have open orders on both sides of the same US Option contract in any related accounts."

I suspect this restriction from my broker is a shakedown because I am not sending orders (paying fees) as a registered MM. So what is the deal behind this and what do I need to change to my account status to be able to quote 2-sided/improve market efficiency?
 
This is a restriction from being a priority customer. Priority Customers displace firm and market maker orders. If you are competing with them, they want you to either register as a BD and be regulated or be a professional customer. Pro-customers can make two-sided markets but then even that is challenging because each option order must be tagged correctly as buy to open, buy to close, sell to open or sell to close. MM's do not that to that requirement. Once you go out there 1.00x1.10 10 up opening on both sides, and do any on one side, the other order is mistagged as open and needs to be tagged as closing. Not worth the hassle.
 
Thanks, I also did some research since this is burning in my head right now. It's a CBOE shakedown.
https://www.cboe.org/publish/RuleFilingsSEC/SR-CBOE-2009-009.pdf

I feel I can take the trade bid/offer and only quoting one side just reduces my fills by potentially 50%. Tagging orders sounds super annoying. Will need to study the retail market structure a little better.

I think the annoying case would be if I put both orders in simulatenously (to open) get filled on one side then need to update the other side to close. I hope its not like that.

I really doubt I am competing with any professional with my packets traversing random chinese internet routers over the internet along with a SSL encrypt/decrypt cycle. So the advantage of having my orders displaced is mostly theoretical.
 
Dude, you can’t babysit a mkt as retail. You will need to register as a pro or run two accounts to make a two-sided mkt. So yes, as it stands, you will have to be filled first.
 
CashDelivery said:
I suspect this restriction from my broker is a shakedown because I am not sending orders (paying fees) as a registered MM. So what is the deal behind this and what do I need to change to my account status to be able to quote 2-sided/improve market efficiency?
More...

two things come to mind:

1) your broker isn't shaking you down. if you think you're going to point-and-click your way through making two sided markets, use your spare hand to spread your cheeks. they're honestly doing a favor.

2) why on earth do you think you'd be improving market efficiency? can you carry thousands/millions of contracts worth of inventory like MM's do?
 
Robert Morse said:
This is a restriction from being a priority customer. Priority Customers displace firm and market maker orders. If you are competing with them, they want you to either register as a BD and be regulated or be a professional customer. Pro-customers can make two-sided markets but then even that is challenging because each option order must be tagged correctly as buy to open, buy to close, sell to open or sell to close. MM's do not that to that requirement. Once you go out there 1.00x1.10 10 up opening on both sides, and do any on one side, the other order is mistagged as open and needs to be tagged as closing. Not worth the hassle.
More...


Robert, do you know if/what are advantages to becoming Pro customer, if any?
I've been working on a strategy that may place 2000+ orders per day (shorting micro-cap stocks, with portion getting filled, some replaced through the day, and others expiring by eod). I'm concerned that this would put me in the Pro bracket, but possibly there are benefits I should be aware of.
 
This only applies to Options.
guru said:
Robert, do you know if/what are advantages to becoming Pro customer, if any?
I've been working on a strategy that may place 2000+ orders per day (shorting micro-cap stocks, with portion getting filled, some replaced through the day, and others expiring by eod). I'm concerned that this would put me in the Pro bracket, but possibly there are benefits I should be aware of.
More...
 
Robert Morse said:
This is a restriction from being a priority customer. Priority Customers displace firm and market maker orders. If you are competing with them, they want you to either register as a BD and be regulated or be a professional customer. Pro-customers can make two-sided markets but then even that is challenging because each option order must be tagged correctly as buy to open, buy to close, sell to open or sell to close. MM's do not that to that requirement. Once you go out there 1.00x1.10 10 up opening on both sides, and do any on one side, the other order is mistagged as open and needs to be tagged as closing. Not worth the hassle.
More...
Bob, Is it your understanding that a non pro customer can be on both sides of the market if the orders are at different exchanges? So say you are bid on the CBOE and offered on the ISE? I have heard mixed opinions on this.
 
Robert Morse said:
This only applies to Options.
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Exactly, and why do we think that is? But alas, it is prohibited. I'm sure it would be very very trivial for CBOE to detect it across accounts as well. Those trades popping up at the same time. Doesn't take that many to statistically triangulate. Plus the MMs will see it immediately, our orders are tagged, right? Man, they'll scream bloody murder for shrinking their margins.

Get banned from the market or worse. Just takes one sweep to make examples of folk and send a message.

Btw, is there a way mute people who you think are purposely spreading disinformation? I mean seriously, it's more profitable to spend time on your algs, folks.
 
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