Minyan Mailbag - Option Execution
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
I'm trading some CQR LH this A.M. and trying to unload some contracts. It's usually like water torture to get them done, yet I see someone else throw 2000 contracts on the ask and get filled immediately. How does this occur? Is it prearranged because of the large contract size?
These are the Cree Inc (CREE:NASD) 12/40 calls. The majority of this trade was executed on the ISE, an electronic exchange mostly used by institutions for large trades. This is a good indication that it was a pre-arranged trade: a large customer goes to a large broker with an order where they agree on price "upstairs" (away from the floor of any exchange).
Normally when a trade occurs, market makers on the floor of a regular exchange like the CBOE only have the choice to either participate or not at the price the broker wants to execute at (pre-arranged trade). If the market makers get upset enough, they can try to "block" the trade by telling the broker they want to do the customer's side of the trade. In this case, the broker can either execute the trade only if it also executes the trade for the market makers as well. This is something the broker hates to do (they get no commission for the trade and they increase their risk).
When the market makers try to "block" a trade, the broker can respond by taking it to another, more friendly exchange or the now preferred choice, the ISE which has no floor or market makers (except other institutions upstairs). This is why trades negotiated upstairs between two parties more often just go directly to the ISE.
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