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The Future Of Flashed Options
With the ban of Flash orders in equity markets now practically a done deal, politicians, and hopefully regulators, will start focusing their attention on Flash derivative products which facilitate not only a two tiered market but potential market abuse by the privileged few who have access to advance looks in assorted securities classes.
While dark pools will ultimately be the critical focal point of tiered market differentiation, it seems the next immediate area of focus will be flash orders in option trades. As before, a major opponent of Flash, NYSE Euronext, provides a few on why flashed options afford club" members the opportunity to sniff out larger market moves. From Traders Magazine:
[Ed Boyle, who runs NYSE Euronext's U.S. option business] argues notes that flashed orders can enable participants receiving the flashes to trade ahead of customers whose orders are flashed, either in the stock market or in options. "When an order is flashed, there's often not a lot of contracts available at the best price," he said. "It's when the market is moving fast that a customer is likely to be disadvantaged [by flash orders]." He added that flash orders proliferated in 2007 when the penny pilot began. Arca has price-time priority and maker-taker pricing for penny-quoted options.
On the other hand, conflcited defenders of option flash include the International Securities Exchange, which is a 32% owner of the Flash trading ECN Direct Edge.
The International Securities Exchange and the Chicago Board Options Exchange argue that flash orders benefit customers. "Customers like this functionality," said Boris Ilyevsky, managing director of the ISE Options Exchange. "They see a direct economic benefit."
He notes that flash order types in options are technically similar to those in equities, although the benefits are different. "Our market makers and members can match the away price through a flash auction," Ilyevsky said. "That gives the customer the away price without paying a take fee that could, on some markets, be 45 cents per contract. The customer fee on the ISE is zero." If there's no response, the ISE's primary market maker in that symbol seeks the best price through a linkage order.
Other defenders appear in the form of the CBOE, whose flash order type will make fans of Isaac Azimov and insane computer everywhere rejoice.
The Chicago Board Options Exchange makes the same argument. Its flash order type is called HAL, for Hybrid Agency Liaison. "Prior to outbound routing, orders are flashed to market participants at the CBOE with the opportunity to match the NBBO and keep the order at the exchange," said Edward Tilly, executive vice chairman of the CBOE.
And the oddest defense of option flashing comes from Will Easley, the vice chairman of the Boston Options Exchange.
Easley suggests that concerns about being traded ahead in options as a result of the information being flashed are minimal for a couple of reasons. First, he said, the other firm would have to take out all the volume at the best price in away markets, which could be costly. And second, orders that are flashed are typically for small size. Easley also notes that options prices do not move as quickly as the underlying price and are less sensitive to those movements in some cases. Even in penny names, it's not a 1:1 move, he said.
The second argument is laughable. The take home message however, is the acknowledgement of the optionality to trade on an exchange away from the host flashing exchange with the gleaned information (in other words, it happens all the time). Whether it is costly is debatable - once a firm has set up the relevant infrastructure via collocation and other front-end loaded costs, the marginal expenditures are negligible. However, it goes to show how deep two-tiered information flow across the markets truly goes: over the past 10-15 years as a result of escalating IT efficiencies, the complicity of exchanges and broker/dealers as well as market neutral funds to operate in a higher plane of faster, advance-looking (and potentially abusive) information, on exponentially increasing stock volume, has been taken to an artform, and the net results have been such market aberrations as flash trades, dark pools, collocation, and ultimately a market, in which trading and liquidity provisioning are dominated by algorithms and other computer controlled processes.
What politicans and regulators need to, and are gradually starting to figure out, is that Flash is not a separate issue - it is analogous to the loose strand in the proverbial sweater: once you start unravelling it, eventually the entire thing collapses. And this is what is notable of Schumer's campaign - the initial focus on Flash will gradually develop into the biggest two-tiered market discovery process, a process which is long overdue. And speaking of long overdue things, the SEC's eventual acknowledgement of Flash (and many more topological concepts to come) as being a detriment to investors, will likely set off a sequence of legal actions, which if nothing else will try to identify who, if anyone, has benefited over the years since Flash (in both equities, options and other products) has been active. Quite a few relevant names come to mind.
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I make hundreds of such trades daily without complaint.
I suggest you find a more liquid asset to trade, or a better broker.
If anyone has ever tried to unload 1000 shares while dark pools were trading heavily, that person has discovered what a horror show feels like. There's almost no liquidity, and your sell order gets delayed. ....no never tried
We just can not compete with the vast amounts of money being used to influence decisions. The Rich article says recommended; one of my favorite new finance sites http://www...
now that is a tough math question...
WTF is the discussion about institutions vs retail traders? If institutions are sending flash orders, THEY ARE STILL YOUR FUCKING MONEY THAT THEY ARE LOSING. YOUR MONEY IN MUTUAL FUNDS, PENSION FUNDS ET AL
Then either call your fund manager and tell them they're being idiots, or do yourself a favor and pull your money out of the funds and put them in lower load ETFs.
If your money is wrapped up in mutual funds, I suggest you look up "12-b-1 fees", and realize that you are paying your fund manager to print up those nice glossy materials showing how well they tracked the S&P 500...
Flash trades should be the least of your concerns.
You should switch from the banana flavored goop in glass jars. Try spoon feeding it to someone else. Most folks here aren't buyers of what you're selling.
Dude, Above comment was from me. I don't have any money in mutual funds. I just hate Goldman Sachs et al who game the system because everybody is too stupid to stop their scams. These people are stealing money... billions... while ordinary people are losing money in their mutual funds while these assholes run one scam after another
8 GulfStream Jets? would that help the jobs saved? or lost?
m-fers
Opposition Emerges to House's Jet Spree
http://online.wsj.com/article/SB124986067095218079.html
"There is a lot of disinformation about health insurance reform (and the stimulus and the TARP) out there, spanning from control of personal finances to end of life care (and the credibility of Secretary Geithner). These rumors often travel just below the surface via chain emails or through casual conversation (and financial blogs). Since we can’t keep track of all of them here at the White House, we’re asking for your help. If you get an email or see something on the web about health insurance reform that seems fishy, send it to flag@whitehouse.gov"
excerpt from
http://www.whitehouse.gov/blog/Facts-Are-Stubborn-Things/
with additional comments in ()
more obscenities directed towards the alternative media from the administration:
http://www.cnn.com/video/#/video/politics/2009/08/09/rs.war.of.healthcar...
TD
I'm glad that you are dragging these issues into daylight. There is no question that under the guise of innovation many practices of questionable nature are now in force. I have yet to hear a valid argument for trading at the speed of light and I cannot believe the arrogance of many of the posts who rave about how tight spreads are now. Tight spreads are only helpful if there is depth . Liquidity that nobody can react to is not liquidity. "Dark" interest and private liquidity pools contribute to mis-pricing .
Isn't illiquidity part of what makes an honest market?
Should I set up another account to trade in?
I can have one account that I let the flash orders front run me.
I could use the other account to front run myself and in effect front run the flash orders front running my first account.
Just gotta stay one step ahead of the game.
Bernanke Should Be Fired
Bernanke never saw this coming then had a panic attack of various alphabet soup measures attempting to prevent another "Great Depression".
About a week ago Calculated Risk wrote "I'd like a doctor who never gave up trying for a cure, but I'd prefer someone with better diagnostic skills."
Indeed.
Praising Bernanke now is like praising a doctor for nearly killing your son because he finally guessed right on the fourth guess (in this case assuming that the right medicine has finally been prescribed, which is debatable).
Bear Stearns collapsed. Did the world end? Lehman went bankrupt. Did the world end? If Citigroup went under would the world have ended? I think not but I cannot prove it. Nor can Bernanke or Krugman prove the world would have ended had Citigroup gone under.
Campaigning For Fed Chairman
In an unprecedented move, Bernanke is clearly campaigning for reappointment. Please see Bernanke Goes On Self-Promotional Media Blitz for details.
It is equally clear that Janet Yellen, president of the Federal Reserve bank of San Francisco, and Larry Summers, Director of the White House's National Economic Council for President Barack Obama, are campaigning to replace Bernanke.
The correct solution of course is none of the above. We need to abolish the Fed and its serial bubble blowing tactics entirely.
Keynesian Clowns Want To "Make Sure"
If the economy has bottomed, pray tell why is a second stimulus needed? Just to make sure?
Keynesian clowns always want to make sure. Then when the stimulus fails anyway, which it will, the clowns will blame it on failure to "Make Sure".
Easy To Praise Keynesian Clowns When You Are One
Krugman has high praise for Bernanke. The reason should be clear but it probably isn't. The reason Krugman likes Bernanke is that Bernanke is willing to throw money at problems just as Krugman would do.
It's easy to praise Keynesian clowns when you are one yourself.
Bernanke (in misguided praise of himself), and Krugman (in misguided praise of a fellow fool), both think Bernanke saved the day.
I think they did nothing of the kind. However, the debate cannot be proven no matter what happens from here on out.
Perhaps Armageddon was not coming no matter what silly measures were taken by Bernanke. Indeed I claim that Bernanke's measures will drag this mess on for another decade, just as happened in Japan.
My claim can only be verified 5-10 years from now. Bernanke and Krugman have a distinct advantage: Their claim can never be proven or disproved given their inevitable fallback excuse "we failed to stimulate enough".
The Seen and The Unseen
The "seen" benefits (prevention of Armageddon) may be a mirage. Financial Armageddon may come anyway, or it may not have come regardless of what Bernanke did. After all, social safety nets are vastly different now than in 1929!
And while most have their party hats are celebrating the "recovery" now, others are asking What Growth is the S&P 500 Pricing In?
Right now we know that the jobs picture still sucks, that credit card defaults are still rising, that bankruptcies and foreclosures are still rising and the budget deficit is out of control.
Furthermore, we can easily see the massive $14 trillion balance sheet of the Fed while the benefit is debatable. The "unseen" is the massive set of problems down the road unwinding the Fed's positions. Those consequences are without a doubt coming down the road.
Presuming we are indeed "On the Brink of Recovery", what PE are you willing to pay given the recovery has not even started, yet we still face the seen and unseen consequences at highlighted above?
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
tyler,
i think "flash" option orders aren't a real problem. all the big orders get put up in the upstairs call around market, if there isn't enough size on the NBBO. even when there is, i would still say its smarter to pay for a real broker. all the flow that is traded through a "flash"-type system is because someone on the ISE or CBOE wants to trade some at a price where it is offered small on the coast of the phlx. the same people are sending quotes to the ISE and CBOE over the system. it's all dinky retail flow. in this situation, it is not only illegal to front-run this type of order, but also incredibly dumb strategy for an mm that actually wants to make money.
"Honey, we got a NOD in the mail today, so we're not going to pay - make sure you buy everything on our credit card, ok?"
http://market-ticker.denninger.net/archives/1314-Americas-NOD.html
Can HFT basically be defined by the "if I had a nickel for every [enter frequently occurring event here]" business model?
A certain privileged few get a sneak peek at orders. If an arbitrage opportunity exists, they then fill it by instantaneously transacting in "market A" (I'll buy your 100 shares of XYZ at 10) and then offset the order in "market B" (while I sell 100 shares of XYZ at 10.01). Profiting, in this example, a penny a share; meanwhile they get what is called in the poker world as "rakeback", or a refund for playing hands / offering liquidity.
And this activity occurs millions of times per day. Hence the "if I had a nickel for every..".
Is this on target?
Yes! If one institution wants to buy at 20.10 and one institution wants to sell at 20.00, then instead of matching those two together and them getting a good fill, these people would would get a look at both orders, buy from one at 20.00 and sell to the other at 20.10. Do that for millions for share millions of times, bribe the exchange with volume and you got one good scam going
So it's a red herring?
Sure, the barriers to entry are high but they are not insurmountable. Tech + Math + Sales and you're a player, I think.
As long as regulators -- who will undoubtedly created a "protected class" -- stay out of the fray, the margins are likely to be squeezed so tight that it no longer makes sense to participate.
And the game will move on to the next exploitable area.
Dude
1. Goldman keeps its servers on the exchange.. so they have fastest access to getting ahead of other people's orders
2. Flash orders are available to very few companies
So margins are not going to get squeezed
This is what a market maker does.
http://www.youtube.com/watch?v=qWqTHYBqPgs
These blogs are ruining Goldman's reputation. Something must be done.
http://www.funnyordie.com/videos/20ec67585f/what-does-hitler-think-of-the-downfall-meme
There is no need for our money to be in anyone else's hands in 2009. It should be encoded in my PC and/or portable disk. Banks are obsolete.
What can a bank do that I can't?
Hopefully someday soon, all money is decentralized into our individual computers and devices and all trading completey bypasses banks and Wall St (P2P?). They are obsolete behemoths limiting progress.
They took the market down, you couldn't do a thing.
They stole you money, you couldn't do a thing.
They played with you fool, took the market even further down, you couldn't do a thing.
You sold, they bought your stuff from you, using your money, you couldn't do a thing.
They took the market higher, 50-60% higher, you couldn't do a thing.
You will buy here, they will sell your stuff to you again, you won't give a $hit....
You are a greedy basturd living in a unethical nation, you deserve to be treated like a $hit.
This topic is completely over blown and misunderstood. First, you claim that the market makers on the cboe or box are going to front run the order away? That is illegal and the exchange would catch that kind of transaction immediately. Second the user can choose which exchange to route his order to. The user should submit his order to the exchange he prefers to be filled on.
Tyler, you astound me again. This post demonstrates that you either do not understand how auction (flash) orders work for options, or you are simply using topics like this to provide the appearance that you are a champion for the little guy.
BOX PIP (or flash) orders are one of the best innovations for the retail investor who trades options. As anyone who trades options knows, displayed spreads on anything but the most liquid of options are quite wide. Orders placed as BOX PIP orders will end up executing much closer to the midpoint, saving the retail investor lots of money. As of August 4, PIP orders have saved investors $250 million (http://www.bostonoptions.com/pdf/200907.pdf). You conveniently ignore this fact.
Banning PIP orders will only further Citadel's near-monopoly in the options MM arena and will hurt the investor.
If there is anybody who truly believes that PIP orders get front-run, it would be very easy to get the log of PIP orders (BOX will provide this) and demonstrate that market orders were placed in the same direction as the initial PIP order.
But instead of presenting real data, such as mentioned above, TD, grand master of all things financial, postulates that PIP orders are bad.
Shame on you Tyler.