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RTs:
I recently posted the response to some questions from RTs for Options
Institute people. Unfortunately, part of the responses from Mr. John Power
floated off into cyberspace somewhere between his computer and mine. So,
the responses I posted did not include all of his answers and actually
mismatched one of his answers to the wrong question.
Please review the following to make sure you have the proper answer. There
are also answers to questions I previously thought went unanswered.
I apologize to RTs for any confusion this may have caused and to Mr. Power
for clouding his efforts to answer our questions. Thanks, again, to John
Power for all his efforts to get us good information on option trading.
Good trading,
Gregg Murray
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Question 1:
ive watched many option quotes and trades...
why is it common to see trades go off below bids and above offers???
this practice almost never happens in equity mkts.
are individual investors, as compared to traders, putting market orders in and
having the option obo or floor traders fill them at lousy prices?
Answer 1:
Options trade prices which are "out of range" of currrent market quotes.
I would need to see specifics of incidents, but you are actually
wrong....option prices are reported outside the market about as often as
equity trades are. The equity trades which occur outside the quote are
identified with a special character on the tape (I just forget what that
character is). Quite often, in the frenzy of activity (especially in a
heavily-traded market) you will have trades which are not turned in
promptly or perhaps turned in promptly but not entered into the computer
promptly as last sales. In this case, most exchanges have software which
insists that any trade enetered outside the current bid-ask spread be
investigated by the person entering the transaction to be sure it is
timely. If it is late and out-of-sequence (it was actually not the most
recent trade) it must be marked as such on the transaction, and that mark
(usually OSEQ) may or may not be carried through your option
price-reporting service to you the customer. That information is
automatically logged in to the Time and Sales log, even if you don't see
it. Where you may see more of this is at exchanges where the electronics
and trade-processing systems are older. CBOE (and, I would assume, all
exchanges) monitors by computer for each of those type of incidents every
day, and investigates any significant activity. Our electronics has reduced
those types of occurrences to a minimum.
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Question 2:
Please ask them why bid/asked prices on illiquid options tend to sit
there all day until I put in an order, at which
time they move (in the wrong direction every time). This happens in
real time as my broker watches them.
Example:
Micrografix calls, bid 2 ½, asked 2 7/8. The spread had been that way
all day, and the stock stayed still all day (to include after my order
goes in).
I put in an order to buy 10 contracts limit 2 7/8 (I wanted to get
filled). What should happen? I should get my 10 contracts at 2 7/8,
right?
Instead, as soon as my order hits the floor, my broker (who is
watching this on his screen) notices that the bid/asked has changed to
bid 2 7/8, asked 3 ¼. I'm stuck sitting there with no fill.
I've tried market orders, but I always seem to end up getting filled
above the asked that way, too.
Answer 2:
Micrografix option quote which "fades" (moves away when you try to hit/lift
one side).
I can't explain this one. I was under the impression that all option
exchanges (Micrografix options do not trade on CBOE) offered a guaranteed
10-contract minimum on the bid or the offer. If that happened again, I
would ask the broker to ask his (her) floor personnel for an explanation
IMMEDIATELY (don't wait til tomorrow or next week). Most of the time, this
happens when market-makers don't update their quotes, and are surprised
when an order shows up to trade at prices which are irrelevant because the
stock may have moved since the quote was made. If the stock has not moved,
you deserve a thorough explanation why you could not get your 10.
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Queston 3:
Would you please ask if they still offer the real good huge Taco Salad
in the members' lounge?
Answer 3:
They have not offered the real good huge Taco alad in the Member's Lounge
since the Health Department caught the staff spitting in the taco meat.
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Question 4:
I'd like to know their advise for getting effective execution of
buy-writes, and what firms would they "un-officially" recommend.
Answer 4:
Firms who do buy-writes.... Sorry, we can't "unofficially" recommend any
firm over another. Those orders are represented as a package, and as such
require a floor broker to "work the order". That floor broker for a firm
might be great in one trading crowd, but another broker (for the same firm)
might be lousy in another crowd. You should pick your brokerage firm like
any other professional...word-of-mouth recommendations and a style which
suits your own.
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Question 5:
If possible could you find out if any of the following persons are still
trading in the OEX pit...they are market makers and I use to clerk for them.
Tom Henrich (AUM)
Tom Gorman (TUG)
Scott Paseltener
Answer 5:
Remember these guys???
I know all these people (you must have been here in the 80's - do you
remember a market-maker named POW?). Tom is still around, but more
managerial than trading since he has others trading in his group. Scott
Paseltener was managing a mutual fund for a while, but is now trading from
off the floor (as of 1-2 years ago). Tom Gorman is off the floor, and I
believe he is trading from upstairs. All great guys, all from the old
Goldberg Brothers Clearing Firm.
--------------------------
Question 6:
How many market makers are there typically for a stock?
Answer 6:
It varies of course, as few as 1-2, as many as 50-75 (more in indexes)
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Question 7:
How are quotes typically adjusted after or before the weekend? Do premiums
typically go up or the spreads widen near the close on Friday to give a
little extra cushion for the 2 non-trading days? At what point is the
reduced time (of Saturday and Sunday) reflected in the quote?
Answer 7:
Saturday and Sunday time erosion begin to get reflected at any time on
Friday, usually in the afternoon.
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Question 8:
I was told that if exchanges have different quotes they have 5 minutes to
adjust
to each other.
Answer 8:
There is no such rule that different exchanges have 5 minutes to adjust to
another exchange's quotes. Options exchanges are in competition and are
expected to set their own quotes independently. Anything else would be
called collusion and be investigated by our friends at the SEC quicker than
you can say "Monica Lewinsky". If an order shows up which is trying to
trade at a better price (which exists on aniother exchange) the trading
crowd will usually
match the better market just to keep the order there. If not, they may
check with the other market by phone to see what's up before they let the
broker send the order over there.
----------------------------
Question 9:
With what obligations does CBOE charge a market maker? At what point would
the CBOE strip a market maker of the ability to be a market maker?
Answer 9:
Market makers are charged with maintaining a fair and orderly market and
providing bids and offers on a continuous basis (when they are present) in
an effort to improve the market when necessary. To define "fair and
orderly" there are pages full of rules on how business must be conducted.
Anyone violating the rules is investigated and can be censured (letter of
reprimand), fined, or suspended, or a combination. Removal from trading
cannot take place without an exhaustive investigation and hearings.
Market-makers are summarily removed for financial deficits.
More powerful are crowd ratings which are filled out by brokers who do
business in a crowd. Low ratings denies a crowd a chance at any new
listings. This can choke the life out of any crowd until they change their
ways, and seems to work very effectively.
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