Play off results Euronext
A small follow up on the play offs for primary market makers in half a dozen stock options. It was announced in October and held during December and January. With rival option exchange TOM capturing a lot of market share amidst shrinking volumes, quoting tight on Euronext is getting a little bit yesterday’s game.
Quoting the tightest spreads will win the play off, and the obligation to quote the options for the rest of the year. For more information on the liquidity providers, check here at NYSE Euronext’s website. The current situation seems to be IMC is losing all their primary quoting rights to one of the three smaller market makers 323, Caerus and Nino. Doesn’t say anything about profitability, though.
- Ahold :
Caerus,IMC, Optiver, 323 Trading - Aperam :
Caerus, Nino - CSM : Caerus,
323 Trading - Fugro :
Nino, 323 Trading - KPN : Caerus,
323 Trading - Randstad :
Nino, 323 Trading - SBM Offshore : Nino,
Leopark
It’s a mixed bag. Nino get the primary market maker license for SBM and Aperam, Caerus takes KPN and CSM and 323 Trading will be happy with Fugro, Randstad and Ahold. As expected, Optiver did defend their position in Ahold.
Last week TOM caught 19% of the total option volume (pdf). Their new daily and weekly options on the AEX has been quite a succes with 42% and 31% respectively. I assume they will roll out their business model to monthly AEX options pretty soon.
Are the market makers mentioned above also present on the TOM exchange or do IMC and Optiver absorb all those orders on their own?
Most market makers are active on TOM too. Optiver, Scrocca, IMC.
any others apart from these 3, any particular favors which optiver and imc get from tom which other mm are not aware of?
Does this mean Optiver is killing it on Euronext ?
Or this just a case where they have so much cash that they dont care about a few dead bodies quoting on Stock options. The index operation kills it and provides the marbles.
The real battle these days is not so much in who gets which PMM positions. Increasingly you see rival firms joining forces to draw blood from the last surviving tax/dividend strategies, now that tax agencies are finally fixing loopholes and exchanges such as Eurex are making things harder for market maker firms to make money with essentially simple strategies.
For example, the well-known strategy where you would capture a portion of the unexercised call options over the dividend date was made just slightly more cumbersome when Eurex started netting the various market maker accounts. No longer was it beneficial to cross shitloads of options with yourself in different accounts.
But it just as easy to set up a second trading company and do the crosses between the two companies. Needless to say, Eurex caught on to that as well eventually.
This has led to rival trading companies joining forces for the purpose of blowing up their options positions (and the open interest) close to the dividend date and sharing the profits. These days you will see smaller firms such as Caerus, Criterion and even Webb Traders entering into such partnerships with giants such as Optiver and IMC. It seems there is still room for more companies to join in and make some easy money (well, depending on which market you play of course).
not the only one, but a well-known example. in case you didn’t know (don’t believe i’m giving away any secrets here am i?)
in the past what you would do is cross a bunch of calls against yourself. obviously you would use different mm accounts, so you would artificially start to increase the open interest the more calls you would cross with yourself. and you would be responsible for a growing % of the open interest.
since the exercised calls were assigned proportionally to your share of the open interest, the unexercised calls are also distributed proportionally to your share in the open interest. so the more options you cross with yourself, the more “free lunches” you get.
of course there’s a limit to how much you will want to cross. the fees can be considerable. here it helps if you’re a mm (on EUREX at least).
a couple of years ago, i think it was in 2009, EUREX started to net your positions in P, M1 and M2 over the dividend. so there was no point anymore in crossing with yourself, it would only generate fees.
but of course if you owned two companies, let’s call them TibrA and TibrB, you just let them cross the options. this was only a minor nuisance. that is, until EUREX said “we’re going to net the positions of TibrA and TibrB, you belong to the same bunch of people. nice try though!”
for that reason, these days you will see actual competitors such as Optiver and (name withheld to protect the innocent) cross a bunch of calls in the same manner. obviously, those two companies have to split the profits now. i.e. Optiver sells a certain number of desirable strikes, and their partner the others.
the strategy hasn’t changed that much really from the situation of say 5-10 years ago. its only that EUREX is making it a bit more difficult for you to blow up the open interest in such an artificial way.
the key is of course which strikes to trade and your size. and profitability can vary quite a bit depending on the market and the underlyings. a bit more illiquid means more stupid investors who forget to exercise their calls. the Dutch market is quite crowded thanks to all the Amsterdam mms. but in the German and especially the Swiss markets there are still very decent profits to be made.
enough money for everyone (until everyone who reads this blog jumps in :-D) we should be friends not rivals indeed!
name withheld to protect the innocent) cross a bunch of calls in the same manner. obviously, those two companies have to split the profits now. i.e. xyz sells a certain number of desirable strikes, and their partner the others.
So then do these firms write each other a check as kickbacks ?
Or does the exchange cross cash balances ?
[…] anonymous: name withheld to protect the innocent) cross a bunch of calls in the same manner. obviously, those t […] […]
> So then do these firms write each other a check as kickbacks ?
erm no. each takes about half of the available and desirable strikes. there’s no telling if it will be an even split of profits. that’s all in the game.
‘don’t believe i’m giving away any secrets here am i?’
there are no secrets, trust, only ignorance or lack of direct replication
‘not the only one, but a well-known example’
which are the other ones?
‘enough money for everyone’
haha, if that amount seems enough to you, then so be it
‘there’s no telling if it will be an even split of profits. that’s all in the game’
long term prisoner dilemma, competitors collude evenly
A more complicated one is buying the deep in the money put and holding long stock a few days before div. then day before div buy the same strike call which is OTM and almost worthless. You must pay between 10 and 25 euro cents for these so they qualify for portfolio protection status. After final open interest snapshot on day before ex you exercise PUT then first thing after ex date you exercise CALL before first open interest snapshot. Total contracts in puts and calls must be the same and divisible by the last 3 digits of the ISIN so you dont change the eurex balancing factor. You receive div on your long hedge and AGAIN on your call exercise due to a quirk in Eurex hamster assignment wheel. So you collect free div. Eurex are so German they know its a problem but can’t fix it until the new release. I think those in the know call it the kamikaze straddle after Mizuho trader Takenoshita who now has taken strategy to MS for a massive sign on no doubt. It’s about being smarter to make the big bucks and then let those open interest inflators squabble about scraps;)
takenoshita has joined morgan stanley? how come that bank is taking on this sort of risk with the german authorities?
‘AGAIN on your call exercise due to a quirk in Eurex hamster assignment wheel’
doesn’t the short call who had long stock get the dividend? whose pocket is this extra div coming from?
“then day before div buy the same strike call which is OTM and almost worthless.”
You lost me when you exercised a far OTM call … how exactly do you make money on that?
Agreed