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Hi Doc,
Thanks for the lengthy explanation. There is a lot of mythology floating
around to explain what happens in the market. It often reminds me of my
collage Physics professor. The would often refer to his "Little Demon"
theory. It went something like this: He would ask something like "Why a
does light from a distant star seem to bend around our sun?" The students
would sit there without a clue. He would then ask rhetorically "Did a little
demon push it?" and then go on to explain Relativity.
A few weeks ago I had the following experience: I was long some OEX
options, but the trade had not gone well and they where trading below my
entry point, but about 3/4 above my stop. A couple of minuets after the
close in N.Y., I noticed the price of the option moving down. There was no
particular news, but it was defiantly moving. Shure enough, it was hit and
I was taken out at the option's low of the day. The price then reversed and
moved up 3/4 point to where it was at the N.Y. close. The next day the
market moved in my direction and I had to reenter at a higher price.
Right now, someone is saying "That proves they ran your stop!" Others are
saying "See, you should never use stops!" I just say "A little demon got
it!" And, right it off to the overhead of doing this business.
Have a great weekend everyone.
Good luck and good
trading,
Ray
Raffurty
----- Original Message -----
From: THE DOCTOR <droex@xxxxxxxxxxxx>
To: ROBERT ROESKE <bobrabcd@xxxxxxxxxxxxx>
Cc: <realtraders@xxxxxxxxxxxx>
Sent: Thursday, August 12, 1999 7:15 PM
Subject: Re: OPTN: How can they do that?
> The way RAE's works, currently, is that the market makers can chose to
sign on
> or chose not to. There are a series of rules about signing off and the
> obligation to be on during expiration, but for the moment I'll keep it
simple.
> In essence the system turns a wheel with market maker names. So if there
are 5
> market makers signed on the first RAEs trade goes to a randomly selected
market
> maker. Then that market maker will get hit with every fifth order. They
do not
> receive a message saying "ORDER TO BUY" but rather a message saying "YOU
BOUGHT
> XXXXXX". It is done in this fashion for the obvious reason of fairness.
Now
> once they have been hit the crowd can choose to change the quotes. At
CBOE
> virtually every quote comes from an auto quote system. This is why if you
are
> watching an option chain of quotes you will see the "cascading" waterfall
effect
> when the quotes change.
>
> Auto quote takes a volatility from the crowd(they physically input it)and
from
> that vol. drives all the quotes. Now some things to understand. The
crowd does
> not have to use the same vol. for every series.....so for example they can
> skew(higher volatility)OTM index put options. The auto quote system
drives from
> the crowd volatility and the last price of the stock/index from the quote
> vendor. There is even a wrinkle here ... auto quote used to drive off
every
> trade in the stock/index. This became a capacity nightmare in some very
> volatile issues like an AOL or YAHOO. So in very volatile issues the
system may
> be set to sample only every 5th print in the underlying ... otherwise the
pipe
> of quote would get jammed almost all the time.
>
> RAEs fills off of the broadcast quote and the fill is untouched by human
> hands(rules are different at some of the other exchanges where some
traders get
> a second look before they fill). We have filed with the SEC to increase
RAE's
> floor wide to 100 contract, although it is unlikely that you would want or
see
> 100 up in equities. There are clearly some challenges with technology.
If I
> had to set my trading to autopilot might I enforce a b/a spread that is
actually
> larger than circumstances require? In reality RAEs and other electronic
systems
> give you instant gratification and maybe that is not always the best
available
> market .... there is a cost to instant gratification.
>
> Some other issues .... the crowd can choose to take an option series off
of auto
> quote. So they might leave the back months on and the deeps and the cheap
in
> the front month, but trade the ATM series manually. They will do this in
very
> volatile issues.
>
> Also currently the automated systems are only available for customer
orders.
> Brokerage firms trading for their own account and market makers cannot use
RAEs.
>
> There is also an electronic order book, visible to the floor, at CBOE.
The
> electronic book, like RAEs, is currently only available to customers. The
book
> has trade priority, except for spread trades. Many on-line account are
actually
> just routing directly into the CBOE order routing system. Market
> orders(currently 20 or less {except in DJX and interest rate options where
the
> amount is higher})go directly to RAEs, limit order more than 2 ticks away
from
> the disseminated market go to the E book, other orders print (physically
or
> electronically depending on the firm)in the trading crowd where a floor
broker
> handles the order. At CBOE Floor brokers cannot trade for their own
account...
> a separation of agency and principal. So if you are the Schwab broker in
AOL
> ... all you can do in AOL is fill.
>
> Hope this helps,
>
> If you are ever in Chicago and want a tour of the floor call me at CBOE at
1 800
> OPTIONS and then wait for the operator and ask for extension 7843... or
shoot me
> an e mail. I'll stand you up in the OEX pit or the AOL crowd, both can
get
> pretty wild.
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