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Market Makers, Specialists and Designated Primary Market Makers are in
absolutely a different business than you the customer. A classic example is the
firm that just attempted to come public ... Hull Trading. Blair Hull(you can
read about him in The New Market Wizards)was a card counter in Vegas. He built
a team of counters who could win even on a five shoe table. Blair built one of
the biggest market making firms in the industry. Operations at CBOT, CME, CBOE,
PCX and overseas. When you trade the e mini you are actually interfacing with
his technology. Hull went to bring the firm public. Their earnings last year
were $50 Million on $100 Million in capital. 57% of the income came from their
Eurex operation and the balance earned here in the US. $50 Million on $100
Million sounds pretty good until you analyze their balance sheet. They borrow
another $1.3 Billion against their hundred million in capital. Net net they
made $50 Million on $1.3 Billion .... a good portion of the income comes from
short stock rebate. Market Makers edge comes not from setting the odds .... how
could you set the odds? It comes from time and place, the ability to get
leverage of 20 to 1 and very low transaction costs. Over thirty people take the
new member class at CBOE every month. 931 seats and almost 400 new applicants
every year. That is almost a high a turnover rate as working for Boris
Yeltsin. An exchange membership sells for about $650,000 currently and leases
for about $8,000 a month. With the 30 year bond at 6% any CAP model would give
you an average income on the trading floor of about $40,000. That average
trader doesn't really exist. Probably well over a hundred of the people at CBOE
earn seven figures or more consistently and just like the card counters they are
not gamblers. Card counters and Market Makers are essentially risk managers.
They will not make money or lose a little money on most trades ..... then do
very well if there is a large event.
Dan Calarusso at the theStreet.com did a story a couple of months back about the
Amazon trading crowd at the AMEX. No one in the crowd was up for the year, how
would you make money if you HAVE to be a seller of premium(if the public wants
to buy)in stocks that can gap 15 - 20% at the opening. Tell me how to set the
"odds in your favor" when you go home short premium on an Amazon, Yahoo, e Bay,
etc. When intraday vol. goes from 40% to 100% commonly how do you skew the
odds.
By the way if the seminar you attended was at the Golden Nugget ... I may have
taught in that one.
ROBERT ROESKE wrote:
> There is absolutely no question that competition is stiff. I met a market
> maker at a seminar in Las Vegas a number of years back. He had been invited
> by a brokerage firm to speak and present his view of the business. I
> believe they called him a designated market maker and at the time was making
> markets in 6 companies. He had a crew to facilitate this business. The
> crew consisted of 6 pentium computers with custom programming that put the
> odds in his favor and there were six very dedicated traders seated in front
> of the monitors. Prior to going to Chicago he had been a card counter in
> Vegas until banned from the Casinos. At that point he and his programmer
> brother went to Chicago and set up a legal odds business. As he stood in
> front of 75 seminar attendies, he was cool, very cool, so cool that you knew
> you were dealing with a formidable adversary. He reassured everyone that he
> wanted us to win sometimes as his business depended our participation. His
> vision was so acute that he could be looking down at the podium and see
> someone in the back of the hall scratching their head. This man wore
> allegator shoes as a symbol of his trade and drove race cars for relaxation.
> He struck me as being incredibly knowledgeable about options marketmaking
> and what really went on inside the business. I had no reason to doubt his
> answers to any of my detailed questions, including those about Bid/Ask
> activity. His photographic memory, quick recall and incredible integrity
> gave him the edge to transfer money from your pocket to his with your
> permission. If he gets your money, its his, period. End of story.
>
> BobR
>
> ----- Original Message -----
> From: kohath <kohath@xxxxxxxxxxxxx>
> To: <droex@xxxxxxxxxxxx>
> Cc: Dick Crotinger <dangle@xxxxxxx>; <realtraders@xxxxxxxxxxxx>
> Sent: Thursday, August 12, 1999 8:29 PM
> Subject: Re: OPTN: How can they do that?
>
> > I lost $300 on that trade, got the commissions back for 6 previous trades
> > that I made with the broker, $150, and closed my account out with them.
> > They were pretty pathetic, anyway. (Advertise on CNBC as Are Your Trades
> > Important To You, They are to Us To, what BS). They advertise their
> brokers
> > are experts, yet the majority of them did not even know what symbols to
> use
> > on their internet site for options! Yes, these were the Internet
> > specialists for the brokerage house.
> >
> > Brokers, from my experience with the majority of them, will tell you
> > whatever they need to to get you to accept a bad fill. Face it, it's a
> lot
> > easier if you accept the fill than for them to have to spend the time
> trying
> > to argue with the CBOE, which is practically fruitless anyway. Why would
> > the CBOE give you your money back. What's the point! If trade A is 5,
> > trade B is 6, trade C is 5, all in a matter of seconds, the market at the
> > time of trade B is 6, and that is that. I more often than not, now that I
> > use limit orders, get my orders filled at or less than what I put the
> order
> > in for. When I used to use market orders, I usually, most of the time,
> got
> > taken for a 1/16 or an 1/8 more than what the market was when I put the
> > order in.
> >
> > The market maker is out to get your money, you are out to get his. Why
> > would he give you your money back if he doesn't have to?
> >
> > Kohath
> >
> > ----- Original Message -----
> > From: THE DOCTOR <droex@xxxxxxxxxxxx>
> > To: kohath <kohath@xxxxxxxxxxxxx>
> > Cc: Dick Crotinger <dangle@xxxxxxx>; <realtraders@xxxxxxxxxxxx>
> > Sent: Thursday, August 12, 1999 7:19 PM
> > Subject: Re: OPTN: How can they do that?
> >
> >
> > > If your broker admitted it was a bad fill why did he accept it? He has
> a
> > > responsibility to you. Floor culture is such that brokers NEVER make
> > mistakes.
> > > A good broker would not trade with whoever filled the order ever again.
> > There
> > > is a crowd of folks who trade and a good broker works the crowd to their
> > > customers advantage. If your broker didn't he in fact may just be
> trying
> > to
> > > shift responsibility. If they a get a fill and know it is bad ... what
> > are they
> > > doing for a living? There isn't a specialist trading the product...
> there
> > is a
> > > crowd of people competeing...if your broker didn't get them to compete
> and
> > you
> > > paid for their lack of effort then you really out to consider the
> quality
> > of
> > > that relationship.
> > >
> > > In my experience ... 9 times out of 10 bad fills are a result of lazy
> > brokers.
> > >
> > > kohath wrote:
> > >
> > > > If there are no extraordinary circumstances then you got a bad fill
> and
> > > > your broker should
> > > > either get it corrected or make good on it themselves.
> > > >
> > > > You may as well by a lottery ticket if you are hoping for them to give
> > your
> > > > money back.
> > > > I had a bad fill about a year ago, not 1/16 but $1.5, (on a market
> > order)
> > > > and my broker agreed that it was a bad fill. We both had the data for
> > the
> > > > time of the fill. Call CBOE, what do you think they said, sorry,
> here's
> > > > your money, hardly, Sorry, the market was at XX and there is nothing
> we
> > can
> > > > do about it, it was a fast market. Yes, very fast, for them, probably
> > > > millions made that afternoon in a few hours off suckers like me (and
> > you!).
> > > > That is why I never use market orders. Talk to the woman who placed
> two
> > or
> > > > three trades on an IPO in the morning, wanting to go only about
> $3,000,
> > > > ended up $250,000 in debt. That's what happens when you do not use
> > limit
> > > > orders.
> > > >
> > > > kohath
> > > >
> > > > ----- Original Message -----
> > > > From: THE DOCTOR <droex@xxxxxxxxxxxx>
> > > > To: Dick Crotinger <dangle@xxxxxxx>
> > > > Cc: <realtraders@xxxxxxxxxxxx>
> > > > Sent: Thursday, August 12, 1999 3:03 PM
> > > > Subject: Re: OPTN: How can they do that?
> > > >
> > > > > Market or marketable limit is assured a 20 up market. If the
> > > > circumstances are
> > > > > as you describe and the option is a single list you are entitled to
> a
> > fill
> > > > at
> > > > > 5/8 and your broker should go back into the crowd and claim it.
> > However
> > > > having
> > > > > said that ...IN ALMOST EVERY CASE ... there is something more to the
> > > > story.
> > > > > Have you queried your broker?
> > > > >
> > > > > Is it possible that because of today's power problems your order was
> > > > either
> > > > > rerouted or handled manually instead of electronically. If there
> are
> > no
> > > > > extraordinary circumstances then you got a bad fill and your broker
> > should
> > > > > either get it corrected or make good on it themselves. The fact
> that
> > an
> > > > option
> > > > > is thing is irrelevant for a small order. The machines are set at
> 20
> > > > contracts
> > > > > on all the exchanges.
> > > > >
> > > > > Dick Crotinger wrote:
> > > > >
> > > > > > I just closed a trade in an equity option, OILHV, at 1515 EST.
> > My
> > > > > > screen (DTN) showed the BID at 5/8, which had fluctuated at 5/8 -
> > 11/16
> > > > most
> > > > > > of the afternoon. 95 contracts traded so far. I felt the stock
> was
> > > > > > correcting and decided to close my long trade in the call option.
> > The
> > > > > > option suddenly dipped to 9/16 bid five minutes AFTER placing my
> > Dreyfus
> > > > > > order, which is where I was then filled. Dreyfus fills this kind
> of
> > > > trade
> > > > > > all the time almost immediately (~30 seconds)... this one took
> five
> > > > minutes.
> > > > > > The option then IMMEDIATELY went back to 5/8 bid. The option
> during
> > the
> > > > > > last 15 minutes prior to the close started bidding at 9/16.
> > > > > >
> > > > > > I KNOW this is a thinly traded option (948 contracts)(but what
> > is
> > > > > > "thinly?"). I KNOW that a market order is for he who wants an
> > absolute
> > > > > > unconditional exit... that's why I use it when I want to pull a
> > trade.
> > > > (My
> > > > > > entries are limits). But this pisses me off. The trade size was
> 10
> > > > > > contracts, and I was under the impression that a market order to
> the
> > bid
> > > > or
> > > > > > ask is GUARANTEED at least a 30-contract fill. Why did this trade
> > go a
> > > > > > notch lower, to the "screw-em" point? HOW CAN THEY DO THAT?
> > > > > >
> > > > > > This is not a big financial deal... he got the teenie and I
> > didn't.
> > > > But
> > > > > > I have to believe that CBOT et al are not happy with the recent
> > several
> > > > > > years reduction in participation by "the public." Well, it's
> > because of
> > > > > > this kind of stuff. Most of the time, I'm happy with my 10-second
> > fills
> > > > > > using the above approach, but once in a while this happens...
> > > > > >
> > > > > > Doc... anybody... is this the only way to do this kind of trading?
> > Why
> > > > > > don't market orders get filled at the market?
> > > > > >
> > > > > > Dick Crotinger
> > > > >
> > > > >
> > >
> >
> >
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