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Maggette


Total Posts: 1078
Joined: Jun 2007
 
Posted: 2018-08-17 11:37
@ES. I think I have heard somewhere (probably here) that some of the bigger equity HFT shops who pushed into option markets did that. They treadted options like any other asset, and options of the same asset with different strikes/maturity as highly correlated assets:)

Don't know how this worked out though.

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

Azx


Total Posts: 39
Joined: Sep 2009
 
Posted: 2018-08-17 15:08
@Maggette: That's one of the rumors from the Virtu thread. Doesn't seem too far-fetched, competing with speed vs mathematical modeling is fairly orthogonal so I imagine both could coexist.

xfd


Total Posts: 12
Joined: Mar 2008
 
Posted: 2018-08-17 21:40
EL: FWIW a recruiter at a well-known OMM contacted me a few months back and I had some modest success getting him to explain their process. I sent a note to the address in your profile.

Baltazar


Total Posts: 1768
Joined: Jul 2004
 
Posted: 2018-08-21 02:25
EL: I believe getco did something like that on kospi a few years back.

The difficulty I would see in your approach is that, apart from out or the money options, minor underlying move will trigger option repricing and I would think the queue position is less valuable than say with cash markets.
Also, depending on the product, quite some trade can happen inside the spread. (I see from an equity index option pointy of view).

This would imply the need to look for a suitable product, not something that could be deployed to all markets.

Qui fait le malin tombe dans le ravin

loltrading


Total Posts: 5
Joined: Feb 2018
 
Posted: 2018-09-07 04:44
almost 10 years back. nothing on the planet trades like kospi did then. near the money options were tick spread, huge size, tiny value per contract, lots of retail. major tech inefficiencies gave a big edge to the first movers there who were clipping 8-9 figures pa but basically nil now.

EL: this happens but it's not market making. most options AMM desks have what they call electronic eye. on sharp delta moves they sweep stale orders like a latency arb. pure HFT firms could play here but the opportunity is kinda limited. when I worked on options desks the serious money was in collecting/keeping bid/ask and the electronic eye profits were just a lagniappe or a convenient way to flatten our greeks.

don't think it makes much sense to do HFT quoting. some exchanges give special privileges or PFOF to DPMs or have pro-rata priority and you have to run so many tickers that you'll inevitably get hit by someone else's electronic eye. turnover was slow even in the liquid penny pilots. if you invest enough in infra to quote competitively, you might as well build better vol models, quote stuff with more juice and figure out how to manage risk better than scalping for a tick.

Jurassic


Total Posts: 181
Joined: Mar 2018
 
Posted: 2018-09-08 19:19
@loltrading are you saying that as delta move fast you sweep stale orders in spot or vol?

also, how is it a tradeoff between vol mols and infra?

rickyvic


Total Posts: 133
Joined: Jul 2013
 
Posted: 2018-12-04 21:30
I read this too.... Quite some time ago.
It should work, I think the point is not looking at greeks which are model dependant.... Assuming that they are active and liquid enough....

"amicus Plato sed magis amica Veritas"

bullero


Total Posts: 30
Joined: Feb 2018
 
Posted: 2018-12-04 23:04
My current state of understanding is that both methods exist - at least in the stories.

But just out of curiosity, EL could you elaborate a bit what you mean (exactly or in a vague sense) when you say souped-up vol model? I am not positive if this has any relevance but few weeks ago I was just browsing that side of the internet where you prefer to have your tinfoil hat and found a post from this one ex-HFT trader who linked some semi-random (but based on the appearance of the LaTeX seemingly legit) publication where these authors were basically doing some vol calibration using NNs. Basically the feeling that I was able to decode from the comment in that post was that the some OMMs were doing something similar.

I have to say that I am not in the position to comment this approach from a theoretical point of view - if the approach makes sense or not. Now, lets us assume that you would do that. What did I gain from this exercise? I find it hard to understand what the 'beef' would be here. My naive estimate would be that doing all the matrix multiplications and mapping intermediate nodes using non-linear activation functions all the way to the result would be at least as expensive in time as naive Black-Scholes, maybe many times more expensive (?).

So the gain here should be higher than the cost I pay for waiting my computations. I could always just go with naive pre-cached BS. Am I missing something?

nikol


Total Posts: 595
Joined: Jun 2005
 
Posted: 2018-12-05 00:40
EL: "just use order book dynamics to set quotes"

During recent BTC collapse I managed to increase initial investment by buying at bid and selling at ask deep OTM june BTC calls. Notional was little, but anyway I was surprised. On the move to automate this trading. I see it can be done using model-independent tricks and straight application of ANN to price different strikes. Maybe I am wrong, but so curious, that it drives me forward.

ronin


Total Posts: 401
Joined: May 2006
 
Posted: 2018-12-05 10:26
> But what happens if you throw out the vol models completely, and just use order book dynamics to set quotes?

You couldn't manage the risks.

The problem is that you have next to no liquidity in any single option contract. You get one, maybe two trades per day. Maybe zero. If you got in, you probably won't get out - not by eod, and not cheaply.

So you offset your risks where you can and where it is cheap.

If you are thinking equities, it is more similar to pair trading than single stock market making.

Having said that, my understanding of the current options market making space is that 99% of pnl comes from taking priority on all levels as soon as the book opens, and maybe 1% from filling stale quotes when the market moves. Which is roughly what the pnl looks like in equities market making anyway. So on the grand scale of things, it is all the same thing. But the details are different.


"There is a SIX am?" -- Arthur

nikol


Total Posts: 595
Joined: Jun 2005
 
Posted: 2018-12-05 11:27
"If you got in, you probably won't get out - not by eod, and not cheaply"

why? you can almost always zero (net) exposure without closing it at reasonable cost. keep it till expiration or till door opens again.

Jurassic


Total Posts: 181
Joined: Mar 2018
 
Posted: 2018-12-05 12:02
> Having said that, my understanding of the current options market making space is that 99% of pnl comes from taking priority on all levels as soon as the book opens, and maybe 1% from filling stale quotes when the market moves. Which is roughly what the pnl looks like in equities market making anyway. So on the grand scale of things, it is all the same thing. But the details are different.

Why is being the first in the queue key in market making (99% of pnl)?

eeng


Total Posts: 23
Joined: Dec 2014
 
Posted: 2018-12-05 12:33
Alpha wise this is a very leveled playing field (just read Baird book or even easier, simply plug your vol estimator of choice into a BS calculator and update your quotes) so the only point where you make a difference is in arriving soon than everyone else doing the same stuff.

quantmatters.wordpress.com

bullero


Total Posts: 30
Joined: Feb 2018
 
Posted: 2018-12-05 12:36
@Jurassic, If I paint the levels at the beginning of the day and assume that each level, on average, receive fills with same lambda* my queue position rises evenly until I am the top of the queue on both sides. If I receive fill on my bid/ask I still have high probability of getting out making the spread before move.

*Of course this is not realistic.

ronin


Total Posts: 401
Joined: May 2006
 
Posted: 2018-12-05 12:45
Guys, honestly...

>why? you can almost always zero (net) exposure without closing it at reasonable cost. keep it till expiration or till door opens again.

Well, that is kind of my point. You manage the risks by netting them out over the entire surface. You can't manage the risks on the level of a single contract.


>Why is being the first in the queue key in market making (99% of pnl)?

It's called adverse selection. This was discussed many times in this forum and elsewhere - look it up. Basically, if you are last in the queue, after you are filled the best price is at the next level and you lost money on your fill. Having people behind you in the queue gives you an opportunity to get out of your fill before the price moves to the next level.


"There is a SIX am?" -- Arthur

Jurassic


Total Posts: 181
Joined: Mar 2018
 
Posted: 2018-12-05 12:56
@ronin thanks

nikol


Total Posts: 595
Joined: Jun 2005
 
Posted: 2018-12-05 14:07
> "You can't manage the risks on the level of a single contract."

On the level of single strike, yes, you can. almost always.
What you trade here is obligation and premium. If you are long, the max you loose is premium. If you are short option, then you can revert it to synthetic long for small cost. Maturity match is prerequisite. But even if there are no correspondent futures, you can always "box" it with an interest rate exposed, which we know how to hedge. etc etc.
It is a bit more complicated and involves more instruments, but all those additional steps are known and can be automated such that you execute the cheapest transaction.

it is like:
trade A or
trade B-C or
trade D-E-F -- whichever looks cheaper

riskPremium


Total Posts: 7
Joined: Nov 2018
 
Posted: 2018-12-05 14:33
@nikol,

sounds you are still hedging out risk on same strike/nearby options/underlying futures which might not give you a competitive quote.

ronin


Total Posts: 401
Joined: May 2006
 
Posted: 2018-12-05 15:16
> On the level of single strike, yes, you can. almost always.

Meaning what - you can trade one strike but multiple maturities? As @riskpremium pointed out, you still have vol model risk between maturities.

But it gets even better. Say you are long one month, and you can go short ten years, same strike. What would happen to your gamma and vega? Does it even matter it is the same strike?

> If you are long, the max you loose is premium.

Sure. And if you are short puts, the max you can lose is the strike price.

Or even better - no matter what you are trading and how, the max you can ever lose is your net assets. Still limited. So no problem I guess?

Why do we even bother with risk management - I mean there is only a limited amount of money in the world, so all losses are contained, surely. No?

"There is a SIX am?" -- Arthur

nikol


Total Posts: 595
Joined: Jun 2005
 
Posted: 2018-12-05 15:31
"sounds you are still hedging out risk on same strike/nearby options/underlying futures which might not give you a competitive quote"

Yes. I treat strike as a single "market".

If you talk about "market wide" price alignment one can always build a price(strike) function without involvement of the concept of volatility. Trade around that price and account for various distortions and secondary effects too, like e.g. pinning, but volatility is not generally needed.

@ronin

I exclude cross-term trades from this discussion.
But you have to take into account all non-arb conditions and they are not volatility related. Once you speak about volatility, it is always about specific model.

Although I do agree that even in our discussion I have a difficulty to avoid volatility concept as it is 'burned' in the brain.

PS. and yes I have to limit myself to European options although I had some success to produce model free prices for Bermudans. For American can not say with certainty.

ronin


Total Posts: 401
Joined: May 2006
 
Posted: 2018-12-05 16:06
Sorry @nikol, I am a bit slow today. But I have literally no idea what you are talking about. None whatsoever.

You are right that if you are dealing with a single option contract, you have no need for a concept of volatility. Volatility exists as a way of interpreting a multitude of option contracts and their relationship with the underlying. If you are looking at a single option contract in isolation, sure thing.

But with that framework, you can not hedge a single risk of your option contract. Not delta. Not rho. Not gamma. Not vega. Not anything. All you have is some random walk with a weird returns distribution.

"There is a SIX am?" -- Arthur

nikol


Total Posts: 595
Joined: Jun 2005
 
Posted: 2018-12-05 16:33
Ok. sure.

Use model free put-call parity to trade at single strike and
Use terminal probability distribution across strikes for single maturity for "competitive" pricing at single strike.
Agree with this concept in mind I would avoid creating risks across maturities and strikes. But still one can hunt for arbitrages across strikes, like this:
K1 "<" K2.
Put(K1) ">" Put(K2) , sell Put(K1), buy Put(K2), keep till maturity.

Let's come back to this later.

Strange


Total Posts: 1501
Joined: Jun 2004
 
Posted: 2018-12-11 14:18
"Use terminal probability distribution across strikes for single maturity for "competitive" pricing at single strike."

That is a proxy for volatility, you have a terminal distribution that has some standard deviation etc. In fact, there were some people using that type of model before Black Scholes came around.

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

Lebowski


Total Posts: 75
Joined: Jun 2015
 
Posted: 2018-12-16 15:50
My questions pertain to being on the wrong side of the electronic eye trade:
1. [Main question]: how does an OMM manage the risk of getting more inventory than they were bargaining for all at once all in one direction because they were quoting many highly correlated instruments and experienced a “sharp delta move?”

Here’s my attempt to wrap my head around this without handholding:
1. Found this helpful post from @radikal:
> Well, if you're working a LOT of orders to hold queue position, and something happens, you potentially are filled on a LOT of deltas. This is especially a problem if you do this overnight when there's not much exit liquidity; so you keep some teeny puts on the book always or some vix call 1x2s etc.
2. Just a bit of uninitiated intuition. Higher delta = higher risk of getting hit when delta is stale, but in practice this is probably largely offset by how wide the bid ask is at different strikes. e.g. near the money you have only half the delta but because the spread is thinner the market doesn’t need to move against you as far for you to become stale.

2. [bonus points]: let’s say one of these Chicago OMMs experiences a knightmare. Because they run relatively lean in terms of collateral and they quote so many different products the net result once the dust settles is they’re filled on all sorts of stuff and they fall below margin requirements. Would they be forced to liquidate like anyone else? Obviously the Chicago props are sophisticated enough to have some level of risk management built into their autoquoters but what other safeguards exist to prevent this sort of scenario?

Thanks. Getting a lot more out of this phorum than I put back in but hopefully this will change in time as I become less green.

ronin


Total Posts: 401
Joined: May 2006
 
Posted: 2018-12-17 10:20
> [Main question]: how does an OMM manage the risk of getting more inventory than they were bargaining for all at once all in one direction because they were quoting many highly correlated instruments and experienced a “sharp delta move?”


I think Blackadder has it covered.

George: If we should step on a mine sir, what should we do?
Blackadder: Well, lieutenant, the normal procedure is to leap 200 feet into the air, and scatter yourself over a large area.


"There is a SIX am?" -- Arthur
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