If Stocks Go Idle, Should Options?

by Adam Warner | July 1, 2011 10:03 am

So as we move at a snail’s pace to address the last accident in the marketplace (as opposed to … I don’t know … trying to anticipate a future one), we get this, via Brendan Conway at The Wall Street Journal:

“U.S. options exchanges are calling for industry-wide talks over new market volatility curbs, which they worry could disrupt options trading if enacted without further precautions for their market.

“The so-called “limit up limit down” rule, aimed at helping to prevent recurrences of last year’s “flash crash,” would impose a 15-second trading pause for stocks that make volatile swings. But trading in the options market would continue as usual under the rules as currently envisioned. Market participants want more clarity on what should happen in options during those tense moments.”

OK, I speak as a former market maker, so I do have bias, but … say what? They want to let stocks idle for 15 seconds, but keep the options trading during the pause? I know MM’s get a bad rap, but that’s patently unfair. In theory, they could (and should) widen their bid/ask spreads in the event that the underlying stock becomes untradable. But in reality, that takes a few blips. And those “blips” will generally involve someone’s High Frequency Trading machine picking them off in as much volume as they can before the markets adjust.

Find more option analysis and trading ideas at Options Trading Strategies[1].

Now before you get the violins out for the MM’s, I should acknowledge they are not exactly mom and pop operations these days either. In fact they now may often share a parent company with the machine picking them off. Not to mention that the machines the MM’s use to make their markets are all programmed to go “wide” if they get slammed with a flurry of same sided orders.

But all that being said, its patently unfair to the MM community to have the obligation to make markets if the equity side does not have that same obligation. And I wouldn’t expect the equity side to have that obligation. So why not shut the options marts for the same 15 seconds? Sure seems like an easy solution.

Follow Adam Warner on Twitter @agwarner.

Source URL: https://investorplace.com/2011/07/options-volatility-market-makers-limit-up-rule/

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