HR - You raise an excellent question. My personal opinion is that you're better off to sell (or buy) 10 at a time, thereby avoiding large limit orders. If you place a large limit order to sell, the MM is in a position to manipulate (temporarily) the bid/ask quote until which time as it becomes personally advantageous for him to fill your order.
Suppose, for example, the current quote is 24 1/8 x 5/8, and you place a limit order to sell 100 contracts at 24 1/4. The MM can benefit by holding down the b/a quote -- even in the face of a rising intrinsic value of the option which would raise the quantity demanded at the price of 24 5/8. In this scenario the MM can be expected to lighten up on inventory, holding off before setting the quotation higher until the last minute. When the MM finally does raise the quotation he fills your order to replenish his inventory, but by this time intrinsic value may have blown by your offer price to sell. When the MM raises the b/a he wants to be secure in the knowledge that he is buying at or even below intrinsic value if possible. That, at least, is his goal. Admittedly not always achievable.
But one thing we should always bear in mind is this. These markets are NOT competitive -- not yet anyway. The fact that an option may trade on more than one exchange, as many of them now do, doesn't in itself mean true competition. The markets will not be truly competitive until a mechanism is in place to route orders to receive the best execution. The head of the SEC Arthur Levitt called for precisely such a system last week, announcing he would give the options exchanges 90 days to come up with such a plan for linkage. Until there is linkage, each MM on each exchange enjoys a degree of monopoly power. As long as this power exists there will be opportunities for MM manipulation, and investors who use either limit, or stop-loss, orders will be fair game for exploitation.
JMHO
Geoff |
