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Dick Crotinger wrote:
>
> I've often heard that floor traders in the equity and options markets
> have a great number of advantages over the rest of us, particularly with
> respect to commissions, speed, and especially being able to "buy at the
> bid and sell at the offer." How do they do this? I can see being able
> to "offer at the offer price" or "bid at the bid price," and wait until
> someone takes the other side of the trade. But I've often noticed, when
> a stock starts to move, that a 10-lot (or 100-lot) of one of her juicier
> options gets bought (at the bid) or sold (at the ask), in either case
> the opposite of what I would do if I were about to enter a trade there.
> I'm assuming that a floor trader or market maker "plucks the apple" just
> before it starts to move... often, the bid/ask changes immediately
> thereafter (and typically such that the trade just consumated becomes
> immediately profitable).
>
> I'm not assuming that us mortals should or could accomplish the
> above... merely wondering how it's done. Any and all explanations
> appreciated.
NW: Dick, it is just the oppposite of what you perceive. The job of the
market maker is to stand there and let you pluck him as he makes a two
sided market via selling on the offer and buying on the bid. On the
CBOE,
when an order comes to the post, the market makers know not whether it
is a buy or sell order. The floor broker representing your order may ask
for a market, "what's the market for XYZ Nov. 50 Calls?". At which time
the market makers are obligated to shout out both their bids and offers,
"2 1/2 - 5/8". The broker notes the highest bid and the lowest offer
which creates the aggregate market at that moment for that option. If
he has an order which is on the market, i.e a market order or a bid
which
matches or exceeds the highest bid or an offer which is at or lower than
the lowest offer, he will reflect that to the crowd. If it is a market
order or a de facto market order, i.e a limit to buy at the offer or
higher or a limit to sell at the bid or lower, then he will trade with
the broker or market maker who first shouted out that bid or offer. If
the size of the order exceeds the number the winning broker or makret
maker wants to do, then the broker allocates second, third, and
succeding "prizes" to the rest of the trading crowd. Please note that no
one in the crowd knew in advance whether they were going to be buying or
selling. Despite this, they offer to both buy or sell at the bid or ask
price. So you can see that it is the market makers who are the pluckees
and you who
are in the position to be the plucker. This is one of the reasons I
decided to no longer be on the floor but rather in "flor-ida".
Pluckingly,
Norman
>
> Dick Crotinger
> richinger@xxxxxxxxxxxxxxxx
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