Daily Options Report

Hey Options Folk, don't assume you're left out of the Flash Trading Fun. This from The Anonymous Blogger Known as Tyler. Since it's always about Goldman, I'll run thru this as if that's who we're talking about here.

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

I have to be honest here. I have no idea how flash orders advantage someone, say GS, in the options marts. The lion's share of all bids and offers are MM's and specialists. The odds of a flash order discovering a "real" bid or offer (a public customer) are remote. And if there is any size hiding out away from the market, trust me, the big players have all seen the order. Every big options order gets shopped around to all the big fish before it ever sniffs an order book.

Could "flash" orders let GS pick off an options market? Like let's say they know the stock is about to move higher, could they load up on calls? Well, sure, But they could do this in any era with any technology. In fact they have done this since the beginning of options time. If anything MM's are in better position now to avoid getting slammed on this sort of thing as they all autoquote everything and can set their machines to widen their markets and reduce their size as they make trades.

Could "flashes" allow GS to trade ahead of customers? I suppose yes. But if it's their customer, again, they could always do that in one form or another. And it's extraordinarily illegal. And for a firm that makes $100 million per day, they could front run every options order in America and it would amount to a rounding error, barely enough for Blankfein's walking around money.

One of the goal's in HFT is to generate rebates for directed volume. In other words, they could even break even on the trade and still come out ahead. Can they do this with options? Not sure, but given the relatively tiny volume, it would have to amount to even fewer pennies than above. And a simple paper trail to follow if everything is double printing.

So, Zero's big argument here?

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.

Stocks have potential to better distribute information on an equal basis. Options just don't. Brokers really only earn money if they can bill somehow on both sides of a trade. Many operations pay $ to see order flow. So if any size is involved, ANY size, they will run through the hierarchy on their virtual Rolodex and do their best to match the trade. Flash trading as I understand it really has nothing to do with this. You'd have to obilterate the whole structure of the business to actually change anything. And that's not happening.