The View from the (Virtual) Pit

Welcome to the View from the (Virtual) Pit, with Mark Oldani. Mark “Odi” Oldani and I have been a combo of friend/co-worker for a long time. Odi is one of the most interesting, witty, and clever people I know. He is also one heck of a trader in my opinion. I hope the Option Pit/Option 911 readers will enjoy his thoughts as much as I do.

“They’re all loaded”, “They live like rock stars”, “They know all the orders and control where options are traded”, “They ALWAYS make money when the market goes up”.

These are just a few of the assumed observations made by the individual investors about today’s options market makers. It seems there is a disconnect between fantasy and reality, brought on by TV, movies, and other avenues which creates this utopian environment in which all options market makers exist. A place where every trade is manipulated, no regulation/oversight exists, and the private investor is hung out to dry.

Don’t get me wrong, there are market makers out there who have made a lot of money. During the early days of options trading through the internet high’s of ‘99-’00 there was so little known about options, the collective few who understood theory and applied it reaped the rewards. These days, however, the scope of the current market making environment has dramatically changed. What was once a bustling trading floor compiled of crowded pits with screaming traders and paper everywhere, is now a scene of “pointing & clicking” which, at its busiest, one could hear a pin drop.

There are many obstacles for today’s options market makers to successfully overcome in order to be profitable. The market maker is the first swept when front-runners come to play with stock-specific knowledge. Also, big firms muscle their way in by clearing out all the market maker prices so they can ‘cross’ orders at the best price. In the past, the market width of a security was anywhere from ¼ point up to 1.00, now can be as tight as $.01. Options are currently traded on any of eight options exchanges, all with their own fee structure charged to the market maker (making a market, taking a market, what percentage of markets you’re on, etc.). Adding to costs is the monthly seat lease (which has ranged from 2,500-15,000 on the CBOE), technology fees, and commissions.

Finally, one of the biggest and most unbelievably pathetic costs of today’s options market maker: payment for order flow. Yes that’s right, the very same option orders the individual investor pays his/her brokerage house commission is henceforth billed to the market maker. Part of the cause is that there are too many floors, similar to the airline wars of the early 2000’s which made flying cheap, but put several airlines into bankruptcy or merger. No matter the cause, it doesn’t seem fair to make the liquidity provider pay to take the other side of a trader’s order.

So, while it may be easily assumed that today’s options market makers are sitting back, taking the orders, and trading them at the most beneficial levels, what the public needs to understand is the risk that market makers take. They have a responsibility to provide liquidity to investors who want to trade options. Whether through speculation, hedging, or if someone “just likes a stock”, the market maker is there to price the options in a way that the price justifies the risk…at the time of the trade. Option trading is not a zero-sum game. If one side wins, the other side doesn’t have to lose. Gone are the days of raising the skull and crossbones flag. Today’s options market maker is trying to survive on the front lines of the market, despite tightening spreads, increasing costs, and constantly evolving automation.

-Mark “Odi” Oldani