Pulling An Unsophisticated Market Maker In Before Hitting Their Bid/Ask

[ronin]

> if I have priority to sell @ $3.00 and I am the best visible offer, can a trade still occur at a lower price? Or will the market maker have to quote $2.95?



I think you are asking two different things here. 2.95 is lower than 3.00, and 2.95 would have priority over 3.00.



Options books have price-time priority. First priority goes by price (more aggressive gets filled first), then within each price level it goes by time (first come, first serve).



And lit orders have priority over dark orders. So a hidden order at 3.00 gets filled after all visible orders at 3.00, but before any orders at 3.01.



If you are the first to quote visibly at 3.00, the only way for somebody to get filled before you is to be more aggressive on price - e.g. quote 2.99 to your 3.00.



But that only works for DMA. If your broker internalises the flow, they can help themselves to any liquidity before passing it on to you. You have to check with them what they do and what their policy is.



> should be to probe with a 1 lot and once I find liquidity come in with my full order.



That's unlikely to work. And even if it does work once, it won't work more than once. If the liquidity isn't there, it isn't there.



A better way to do it woud be to look for cheaper proxies. Maybe you can get cheaper gamma from the index futures, maybe cheaper vega from the etfs, maybe delta from the underlying. And then worry about slippage.

[EspressoLover]

Lots of good replies here, that I think have pretty much covered everything. I'll just add one more idea, that may or may not help.



You might try flashing your order on a periodic basis. E.g. say you're hoping to buy at $2.75, but the MM is sitting on the ask at $3.00. Submit a limit bid at $2.75, let it sit for 5ms, cancel, wait 50ms, repeat. Keep trying this for 20-100 cycles. The MM may be willing to meet you at $2.75, instead of his normal $3.00 reserve for two reasons:



1) It credibly signals that your order isn't trying to take advantage of some latency arbitrate. Since the order's arriving on periodic, predictable intervals, you're proving that the order isn't a direct response to events in other markets.



2) It credibly signals that you don't have a big inventory sitting behind the order. Because if you did, you'd be interested with interacting with as much liquidity as possible. Not just low-latency market makers. Therefore instead of cancelling the order after 5ms, you'd let it rest so that it interacts with the natural flow in the market.



Whether this works or not is completely dependent on whether the MM's bot is programmed to recognize the behavior. So, definitely can't tell you whether it will work in your case or not. But it's probably worth giving it a shot.

[nikol]

Interesting phenomena:



At the time of sharp market move, the liquidity disbalance creates short term arb opportunities, which is difficult to exploit because massive orders overload matching engine (maybe intentionally, but does not matter) so its low responsiveness destroys the necessity for speed and perhaps collocation.



I am forced to restrict market-making because I loose control over my orders which can be compensated with wider spread (following AvSt model).



Do I have any other tools?



PS. It is like living within paralyzed body seeing everyone moving around but unable to speak and even move. )

[nikol]

Does it help to monitor exchange responsiveness time (e.g. last duration of order service) and to use it for price penalty?



If I notice abnormal delay, then I either remove orders or just add my penalty.



does it make sense?