Received more than a few emails about MM's. I inadvertently told the truth in my SI bio. No hate mail, please, but here's what I know about it from my perspective as an ex-MM (options), dancing on the floor with all those others in what has been falsely advertised as the most orderly financial market in the world.
When I was in the crowd on the floor, the "specialist" was the guy who was responsible for maintaining the orderly nature of the market for the options on a particular stock. He'd post bids and offers, match buyers and sellers, always taking his share of the vigorish. If someone wanted to sell 100 calls on a particular stock,depending on the size of the crowd and which MM's were on the bid, the specialist would take 20 - 40% of the trade (20 - 40 contracts) and sprinkle the rest around to the MM's depending on how much he liked you. Now, if as an MM, you moved the markets too much, the specialist would say, "Mark, I didn't see your face in the crowd. But you're on the bid and offer, you can participate. Next time." A specialist's job, irrespective of the official party line, is to make profits for his firm. If he can't do it, they'll hire someone else.
The MM's were a bunch of financial entrepreneurs. Borrowing from their second mortgages, grandmothers, or windfall real estate gains, MM's would lease a seat on an exchange, find a firm to clear them, and then do what MM's do: make markets. Officially, of course. Whatever the crowd, you could move the market: I'm 4 1/2 bid for 10 on the Feb 90 calls with 10 offered at 5 1/2. Now that's a pretty big spread and it isn't exactly moving any market. However, if the crowd was thin and the activity robust, you had the opportunity as a MM to steal from the public. Just by selling on the offer and buying on the bid. If you bought 20 contracts on the bid, 10 seconds later, you'd go to a phone, pick it up, and ask a broker to short 1500 or 2000 shares of stock, hedging your bet, and to some degree, locking in your profit on the trade.
If you ran tighter markets in bid and ask, or were too visible in the crowd based on what you were willing to trade, you ran the risk of the specialist not liking you. Afterall, you were taking away the money he was going to use to take that winter vacation to Martinique or the Jersey Shore.
What did MM's do when news was uncertain or a stock was extremely volatile. If you had the cajones of some of the SI threaders (I'm thinking Kemble and a few others), you'd continue to make markets and based on a combination of luck and your sixth sense that analyzes a bet and its relative risk, hope you made some money at the end of the day.
Most MM's, during periods of uncertainty, went to the bathroom or lunch ("I'm out of my bids and offers"). That behavior, of course, prevented them from being on the wrong side of the bet, but exacerbates market slides, in particular.
When you look at the crowd, you would think each MM had a different body, some kind of trading jacket, and a brain that went with it. But the resemblance to the heard mentality is strikingly similar. Depending on the circumstances, MM's would say, "I'm on the posted bids and offers", "Me too", "I'm there with you on all the bids and offers".
So, just by being on the floor, you were allowed to do what specialists and MM's do best: steal from the public. In the vernacular, our job was to "f..." the public customer. We did it every day, dozens of different ways.
Just a few thoughts I would offer to you and they are IMO.
Never leave an options order on the book. It only gets executed when the MM or the specialist can do it at a price that makes them a profit.
Never leave a GTC order on the book. It also only gets executed when the MM or specialist can take the other side of the trade at a price that has guaranteed him a profit.
Every trade is clocked in and clocked out. Note your order times when you place them. Although it is not supposed to occur, sometimes the order tickets are stamped using a clock that's a few minutes different from your Rolex. Is it intentional? I have my opinion on the matter.
I could meander forever on the matter, but would likely bore you and worse, be unable to look at my positions and how far Dell has gone up after I sold the Feb 95 calls.
Although it may seem trivial, I left the floor because I got tired of the people there. On any given floor, you can find some of the most rude, vulgar, and ego-centric individuals. But I also didn't like the commute.
Just like investing, life is about choices and advances in technology moved me off the floor and into my personal office where the fireplace is always burning, CNBC is always broadcasting, and SI is always threading.
Good luck to you all and thank you for sharing the information you have learned.
Best regards,
Mark A. Peterson |
