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> From: Hubert Lee <optfool@xxxxxxxxxxxxxx>
> To: optionfools@xxxxxxxxxxxxxx
> Subject: A trader's reply to Bid/Asks
> Date: Thursday, August 28, 1997 7:24 PM
>
> Here is the continuation of the bid/ask topic:
>
>
>
> IMPORTANT
>
> Folks, Here we get a view on the bid/ask discussion of
> last week by a specialist. This is a valuable letter. Floor
> traders do not often divulge their techniques.
>
> Topic: Follow-Up on Bid/Ask Column by Trader X
>
> Dear Option Fool:
>
> I agree totally with what you said about bid/ask spreads.
>
> Here's my philosophy from a trader's perspective.
>
> A floor trader might make some money by trading
> options on the bid and ask, but big two-way volume is
> required (in which case a customer may feel more at ease
> when placing limit orders between the bid and ask).
>
> FOR THE REST OF THE DISCUSSION, ASSUME
> PAPER FLOW IS LIMITED.
>
> For the most part, if paper flow is limited, a floor trader's
> dream come true is a limit order which does not
> necessitate an immediate fill. The trader can (and will)
> lean on the order, probably pre-hedging with stock. If
> the stock goes the trader's way, the order will not be filled
> and the trader will scalp the stock. If the stock goes
> against the trader, the order will be filled.
>
> For the customer, limit orders between the bid/ask reduce
> the odds of profiting from the trade. If, the customer is
> so price sensitive, a fill-or-kill (FOK) or immediate-or-
> cancel (IOC) order should be considered.
>
> Trader's hate to let honest paper get away.
>
> On the other hand, some traders don't like to encourage
> trading between the bid/ask and will often kill or cancel
> such orders.
>
> The more competitive the pit, the more likely the
> customer will get filled between the bid/ask, and the less
> likely the order will be leaned on.
>
> In my opinion, I give the best treatment to market orders
> or marketable limit orders. For 10 or less contracts,
> RAES is the best way to avoid cheating. For larger
> orders, I think FOK or IOC orders benefit the customer
> in that the traders cannot lean on them.
>
> You're right about AONs. They are a pain in the you
> know what. I cannot book them, therefore they lose book
> priority, which is the #1 customer advantage. Also, it's
> easy to break up orders so that it appears the AON could
> not have been filled.
>
> On a side note, customers should watch out for orders on
> the opening. Usually, traders take advantage of knowing
> the order flow before opening the option. At the risk of
> the stock moving, the customer might be better off
> waiting for opening prices and then sending the order.
>
> I hope this doesn't paint too bad a picture of floor traders.
>
> Good brokers, though, can avoid problems by knowing in
> advance what situation they are about to enter into
> (liquid, illiquid, DPM, crowd, cboe, amex,...)
>
> Trader X
>
> Dear Trader X:
>
> Thank you for the honest response. A think our readers
> will find a few eye opening points here. You've done a
> great service to the public.
>
> I'd watch your step from now on in the exchange bath
> room - you know how the crowd dislikes squealers ;).
>
> Your application to the Option Fool Witness Protection
> Program has been approved. Just follow the strange man
> in the sunglasses...
>
> Good Luck! Hubert Lee, The Option Fool
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