Forums  > Trading  > Automated Options Market Making  
     
Page 1 of 2Goto to page: [1], 2 Next
Display using:  

JamesSin


Total Posts: 3
Joined: Oct 2007
 
Posted: 2008-11-17 07:44
Besides Citadel , who else does this? What's the general idea behind this umbrella of strategies? Has anyone worked for such a desk - and if so, please share.

urnash


Total Posts: 564
Joined: Sep 2006
 
Posted: 2008-11-17 09:53
Well, in general it is simply earning the bid-ask spread Smiley. You can either wait for small mismatches between future & option, or you earn some money because the exchanges pay you (in one way or the other) for the risk that you run when you continuously post bid & ask prices for certain sizes. EDIT: typo removed.

in the street of the sky night walks scattering poems -- E.E. Cummings

lys


Total Posts: 49
Joined: Apr 2008
 
Posted: 2008-11-17 10:29
I believe IMC trading is active in that space...

/lys

Baltazar


Total Posts: 1765
Joined: Jul 2004
 
Posted: 2008-11-17 10:29
this is "why option market making", then "why automated?", i guess to do faster and cheaper.

Could also be useful to be allowed to go short financial stocks :)
Could also be useful as a piece of a bigger automatic option trading system to reduce entry and exit costs.

And for the who, any option market making house is doing it automated up to a certain point. At the very least option prices are calculated automatically as the underlying changes.
GS bought a big name in automatic trading, Credit suisse is doing it as well as BoA, so i've read on the web.

Qui fait le malin tombe dans le ravin

keikobad


Total Posts: 3
Joined: Dec 2007
 
Posted: 2008-11-17 14:43
Timber Hill--see the SEC filings for Interactive Brokers for some information (scope, profitability).

filthy


Total Posts: 1259
Joined: Jun 2004
 
Posted: 2008-11-17 16:12
i guess the glib answer is "who isn't doing it?". practically everyone automates to some degree. also citadel were late to this space. i think they only started market making in 2002. and a fairly good rule of thumb is that if citadel is doing something, it is an industry standard. they are not a bad firm, but neither are they on the edge of innovation. practically all of their traders came from somewhere else.

"Game's the same, just got more fierce"

JamesSin


Total Posts: 3
Joined: Oct 2007
 
Posted: 2008-11-18 00:03
I understand that any options market making desk will have significant quantitative/computer aided components - especially for exotics. But that's not what I meant. I was asking about shops that use fully automated algorithms to generate buy/sell signals and post quotes in equity derivative space.

filthy


Total Posts: 1259
Joined: Jun 2004
 
Posted: 2008-11-18 00:13
i understood what you meant. my earlier answer still applies

"Game's the same, just got more fierce"

JamesSin


Total Posts: 3
Joined: Oct 2007
 
Posted: 2008-11-18 00:20
Ok, I guess my follow up is - Who are the big players here?

ax


Total Posts: 74
Joined: Jul 2007
 
Posted: 2008-11-18 00:23
you can look at the members of ISE or cboe. they all stream quotes. if you mean automated options trading in a market taker sense that might be different.

Baltazar


Total Posts: 1765
Joined: Jul 2004
 
Posted: 2008-11-18 09:16
Actually i think automation is more for vanillas than exotic since you want to trade big volumes very fast.

Note that you are touching a sensitive subject as it is the core business of some shops and they won't disclose their degree of automation.

Streaming quote can be the result of a fully automatic system or a junior trader pressing buttons, i don't think that tells all.

Note that a market maker does not generate buy/sell signals as he posts bid-asks (shifted toward a direction maybe). Generating signal is usually more a market taking approach as pointed out by ax. Of course any market maker is doing a bit of prop trading as well so uses signal internally but that's a different story.

I suspect looking at who does the biggest volume in option (if such a thing is published) is an indication, checking registred market makers as well. A shop with a good algo is probably MMaker in many similar instruments.

Qui fait le malin tombe dans le ravin

ag987654321


Total Posts: 8
Joined: Nov 2008
 
Posted: 2008-12-10 22:42
Knight trading are in this space..
Alot of people have a vol surface that they use to price off and run the whole thing as an inventory based model- get paid move the price up.. adjust the vol/smile and make the next price kind of thing..

and very most of the automated stuff is in vanilla exchange stuff

athletico


Total Posts: 954
Joined: Jun 2004
 
Posted: 2008-12-11 03:35
What I'm curious most is if people usually move their vols as their inventory changes, or if they have a different way of charging risk premium.  On the surface AMM seems like a nonlinear problem, i.e. the marginal edge I require for the 1st option I sell < marginal edge for the 500th option, so I don't see how simply moving vols would work.

Baltazar


Total Posts: 1765
Joined: Jul 2004
 
Posted: 2008-12-11 09:12
I think it makes more sense to have two systems: one that adjust the vol and one that adjust the quotes based on vol and inventory.

in the end you just move prices based on inventory but if you work with your vol surface how do you make sure, for example, you don't buy too much dividend?

Qui fait le malin tombe dans le ravin

ag987654321


Total Posts: 8
Joined: Nov 2008
 
Posted: 2008-12-11 17:52
I am telling you what they do... they move vol and manage inventory in separate processes.

If an option strike is being bought or sold they will shade the price of that particular strike... that of course has implied vol implications so they will keep showing an axe but will have changed the vol surface to be buying cheaper options/selling expensive options around the strike/date that is in demand..

Hope that makes things clearer

ZeroBeta


Total Posts: 84
Joined: Oct 2006
 
Posted: 2008-12-11 18:43
"showing an axe" means what?

ig0r


Total Posts: 164
Joined: Jun 2007
 
Posted: 2008-12-11 18:45
lol I'm guessing an offer

filthy


Total Posts: 1259
Joined: Jun 2004
 
Posted: 2008-12-11 19:07
it is from "having an axe to grind". it means that are much more inclined to trade on one side of the spread than the other.

"Game's the same, just got more fierce"

Baltazar


Total Posts: 1765
Joined: Jul 2004
 
Posted: 2008-12-12 09:06
of course in liquid market one could also play with asymmetric volumes for the quotes instead (depending if the exchange permits obviously).

Qui fait le malin tombe dans le ravin

Jurassic


Total Posts: 134
Joined: Mar 2018
 
Posted: 2018-07-15 21:41
> Note that a market maker does not generate buy/sell signals as he posts bid-asks (shifted toward a direction maybe).

@Baltazar how do they determine bid-asks without a signal?

nikol


Total Posts: 481
Joined: Jun 2005
 
Posted: 2018-07-21 14:30
If i interpret the above correctly - MM of vanilla options is based on treating all strikes as individual markets connected to each other via a model. So, MM's maintain neutrality of the book by balancing demand-supply (preferable) or by hedging.

As for exotics, the desk might play certain role on the level of organization (e.g. bank), which is not visible to the desk.

fomisha


Total Posts: 33
Joined: Jul 2007
 
Posted: 2018-08-01 22:09
Here is the list DPMs on CBOE
https://www.cboe.org/general-info/cboe-members-contacts-dpm-directory
Similarly, you can get the list for other exchanges.

Risk management approaches utilized by OMMs vary depending on what names/expirations they trade, inventory turnover, risk appetite etc.

Jurassic


Total Posts: 134
Joined: Mar 2018
 
Posted: 2018-08-07 23:26
how much is options market making automated now in banks vs human market making?


EspressoLover


Total Posts: 330
Joined: Jan 2015
 
Posted: 2018-08-15 21:07
While this thread is bumped, I'm going to quasi-hijack for a semi-related tangent of discussion...

What's the feasibility of running an electronic option market maker like how HFT is done in equity space? The impression I get is that having souped-up vol pricing models is a lot of the secret sauce at most OMMs. But what happens if you throw out the vol models completely, and just use order book dynamics to set quotes? You keep inventory small and turnover high, focus on collecting small but consistent profits per contract, run at low latency to get ahead of the market, avoid overnight risk, and stay confined to liquid strikes on liquid names.

You're basically piggy-backing off the information content of other OMMs' vol models by swimming with the order book. Join queues when they start grow, and exit levels when they crumble. Maybe a less extreme version, would be using vanilla Black-Scholes to back out deltas, and adjust quotes when the underlying moves. But still, nothing required other than simple off-the-shelf vol models. You can easily drop that on top of an existing HFT tech stack.

I have very little experience in options space. So I'm thinking the answer is either A) yeah, tons of people already do that, or B) that clearly doesn't work for [obvious reasons]. But still from talking to OMM people I get the sense that the process is qualitatively different than HFT in equities/futures/FX. I think not every OMM could do this, because there's a lot of money in the less liquid strikes, and in taking on outsized, hard-to-manage risks from mis-priced vol surfaces.

But I would expect a fairly large segment of the OMM space would run this way, in which case that subset would be dominated by the existing HFT shops. Yet, you generally don't hear about those firms having any significant toehold in options. Maybe the answer is C) sure, you can do this, but the profit potential compared to ordinary OMM is de minims...

Good questions outrank easy answers. -Paul Samuelson

DoiAng


Total Posts: 1
Joined: Aug 2018
 
Posted: 2018-08-16 22:42
>What's the feasibility of running an electronic option market maker like how HFT is done in equity space?

Counter-question: what is feasibility of running an electronic equity market maker like how option market making is done (Baird and option replication)?
Previous Thread :: Next Thread 
Page 1 of 2Goto to page: [1], 2 Next