Do US stock option market-maker have to buy and sell?
July 2, 2006 1:45 PM Subscribe
Regular old US stock options (not employee stock options): Anyone know if a) the market-maker / clearinghouse is required to buy and/or sell every call and put listed? b) and, if so, how many contracts are they required to buy and/ sell? MORE INSIDE...
I've looked everywhere, on the CBOE website, through McMillan's book and others and lots and lots of other websites. Basically, I'm sure that I once read that the option clearinghouse (aka the market-maker) is required by law to buy and sell a certain # of calls and puts of every series listed, even if they are trading at $.05. IOW, if you are willing to pay or sell at whatever their buy or ask price, they have to sell or buy. Do I remember this right? And how many contracts? I seem to remember 20. Does that sound right? And is it x number of contracts per transaction or per client or per day or what?
Did I mention I've been trying to figure this out for nearly a month? Arrrgh.
I've looked everywhere, on the CBOE website, through McMillan's book and others and lots and lots of other websites. Basically, I'm sure that I once read that the option clearinghouse (aka the market-maker) is required by law to buy and sell a certain # of calls and puts of every series listed, even if they are trading at $.05. IOW, if you are willing to pay or sell at whatever their buy or ask price, they have to sell or buy. Do I remember this right? And how many contracts? I seem to remember 20. Does that sound right? And is it x number of contracts per transaction or per client or per day or what?
Did I mention I've been trying to figure this out for nearly a month? Arrrgh.
First, the clearing house is NOT the same as the market maker. The market maker uses a clearing house to clear his trades. The clearing house is like your brokerage house. Second, on the CBOE there are designated and primary market makers that have an affirmative obligation to honr the quotes on the screen up to 50 for some lower priced options and 20 for higher priced ones. Good luck enforcing that rule. A specialist on the Amex has an affirmative obligation to make a fair and orderly two sided market. Again, hard to define a fair and orderly market when prices of the underlying are flying around.
Most of the time your orders are entered electronically to either the CBOE, the ISE, Amex or PHLX. They are automatically executed against the screen quote and allocated to the market maker based on various orders of priority, parity and precedence. The market maker's edge is in being able to buy on the bid and sell on the ask (among other edges). The quotes themselves are almost always automatically updated by algorithm.
I am not currently actively trading options. I am not associated with any firm that is or that provides customer access. Having said that, I reccomend a firm called Think or Swim for trading. They have the best interface, they calcluate the greeks for you and their execution times are fast. My customer service experience with them is limited as their software worked, but the few times I had to call up, they were helpful.
Remember before trading options that off floor customers (non market makers and non pros) are at a significant disadvantage to the pros. Use options to hedge positions and to increase income (buy-writes). Trying to trade them in and out for profit as a customer is a losing game. Just my $0.02 YMMV.
posted by JohnnyGunn at 4:00 PM on July 2, 2006
Most of the time your orders are entered electronically to either the CBOE, the ISE, Amex or PHLX. They are automatically executed against the screen quote and allocated to the market maker based on various orders of priority, parity and precedence. The market maker's edge is in being able to buy on the bid and sell on the ask (among other edges). The quotes themselves are almost always automatically updated by algorithm.
I am not currently actively trading options. I am not associated with any firm that is or that provides customer access. Having said that, I reccomend a firm called Think or Swim for trading. They have the best interface, they calcluate the greeks for you and their execution times are fast. My customer service experience with them is limited as their software worked, but the few times I had to call up, they were helpful.
Remember before trading options that off floor customers (non market makers and non pros) are at a significant disadvantage to the pros. Use options to hedge positions and to increase income (buy-writes). Trying to trade them in and out for profit as a customer is a losing game. Just my $0.02 YMMV.
posted by JohnnyGunn at 4:00 PM on July 2, 2006
Best answer: For the CBOE, this is covered in Rule 8.7. It's a bit complicated, but for a market-maker that does more than 20% of its volume electronically:
"A Market-Maker will be required to maintain continuous electronic two-sided quotes for at least ten contracts (undecremented size) in 60% of the series of his/her appointed classes. If the underlying primary market disseminates a 100-share quote, a Market-Maker's undecremented quote may be for as low as 1-contract ("1-up"), " ...
Also, the spread between bid and ask is limited.
posted by sfenders at 5:03 PM on July 2, 2006
"A Market-Maker will be required to maintain continuous electronic two-sided quotes for at least ten contracts (undecremented size) in 60% of the series of his/her appointed classes. If the underlying primary market disseminates a 100-share quote, a Market-Maker's undecremented quote may be for as low as 1-contract ("1-up"), " ...
Also, the spread between bid and ask is limited.
posted by sfenders at 5:03 PM on July 2, 2006
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What you describe sounds like the role of a specialist on an exchange (though I'm really only familiar with specialist as they exist on the NYSE). On the NYSE, a specialist maintains the bid/ask auction process and will step in to stablize prices and provide liquidity while still trading for their own book. But the specialist is not the sole market-maker for a particular security--investment banks will make a market in certain securities as a service to their clients and for their own gain. Investment banks have an interest in keeping the options markets liquid, so they probably fill the role you describe without being contractually obligated to do so.
posted by mullacc at 3:56 PM on July 2, 2006 [1 favorite]