Options update for Oct 9...This is why automation sucks!!!
Anyone who wants to know what the fatal flaw in an 'order-driven' automated market need only look at the opening of BCE today on the TSE. (Mind you, this is only one example...to some degree this happens all the time). Bell closed yesterday at about $43.80, and today, with the S&P down 7-odd points and the bonds down size, a lower opening was to be expected. The system was showing an opening level of 43.15, which seemed about in line. I had a small bid in at 43.10, looking to buy some more on further weakness. At the last minute a broker whom I will not name entered an order to sell 10,000 Bell at the market, and within seconds it opened at 42.15. That is not a typo--it opened one dollar below the indicated market. I was filled at 42.15, and the stock quickly rose back to the 43 level. Sure, a small windfall for me and the other buyers, but I personally would have bought it all at 42.75...it probably shouldn't have opened lower than 43. So, the client got screwed big time. Welcome to order-driven automation. In the old days the responsible RT would have matched up buyers with sellers, and maybe delayed the opening to allow interested buyers know there was stock for sale, preventing the rape that occurred today. The worst part is, this is the system of trading they're going to bring in for options and futures. Think about it...if this can happen in Bell, what's going to happen in a thinly-traded option series? What if everyone wants to sell and there are no buy orders in the system? I repeat, this is the fatal flaw in the system. Open-outcry, or auction, trading like we have now provides disclosure and discovery, allowing traders to respond to incoming orders and ensure trades occur at appropriate prices. The new system specifically prevents this...incoming orders can *only* trade with orders that are already in the book.
So let's take a further look at what lies ahead for the Toronto derivative market. If the floor is closed, all the traders and specialists will be forced back to their offices. Each trader will have to have a trading system, which the exchange will charge for. They won't say how much, even when asked repeatedly and directly, but my guess is something like 2 to 3000 a month. This alone will force most of the independent traders out of the game. The firms will look around and say, well why do we have five guys here needing machines when we could do all our business with one or two and save that money? This will weed out some specialists who may be good at their jobs but not necessarily big 'producers'. So let's just estimate that half of the current 'liquidity providers' as the exchange calls us, are gone.
Lack of liquidity leads to wider spreads just as surely as night follows day. The firms (remember, owned by the banks) will replicate the way they currently trade equities for trading options. They hire 'clerks' who are told to cross all the orders and then get on the bid or offer to replace the position. There is no commitment to the market, just a use them and lose them mentality. So we will evolve not just into an 'order-driven' market, which is shaky at the best of times, but into a 'dealer market' wherein you can only trade at prices offerred by your broker. This is the worst possible scenario--it is NASDAQ, a market so odious the SEC has forced them to clean up some of their most blatant self-dealing.
Well, this is getting a bit long. If you're still with me, here's a brief options update:
BCE: Besides the 'eventful' opening, the stock still looks lower. We had a client do a one-up 1000 contract roll from Oct 40s to Nov42s. I liked the trade as it gives me a good bend on the down-side. (25.5,25)
ABX: Spot gold broke the $330 level on a severe reversal; ABX, which had reached 34.15, plummeted to 32.70. I pumped out my long position as fast as I could when spot broke, and put out a few extra for good measure. I expect at least another dollar down, since I don't see support for gold above 322. Call vol picked up a little. (32,33)
N: I don't think I'll talk about INCO until it starts acting like a stock and not the Lusitania. Vol still rising. (34,29)
Remember, this is all my opinion and should not be construed as recommendations of any sort.
I have a great example of what a 'warm and fuzzy' (not) place the current management has made the exchange, but I'll have to save it for later.
Happy trading.
Porter |
