Q and A. Cancel/Replace an Open Order

As many of you know, tweets (comments via Twitter.com) are limited to 140 character, and thus, must be short.  But it's possible to send/receive important information.  Here's one I recently received from jcvictory:

"Bid $3.00 for a July Iron Condor all morning. Lowered price to $2.95 at 1:30PM & filled instantly. Your expert opinion?"

JC had entered an order to buy an iron condor (that means selling a call spread and selling a put spread) using RUT, Russell 2000 index options.

He wanted to collect a premium of $300 per iron condor and patiently waited for a fill (his order to be executed).  He is raising the following question: 'I lowered my offer by a nickel and the new order was filled instantly.  Is there anything unusual about that.'

From my perspective there are several important points worth discussing.

1) It's certainly possible that his asking price of $3.00 was just a bit too high and no one was willing to pay that price.  But as soon as the offer was reduced to $2.95, someone jumped right in and took the other side of his trade.

The question is: How does he know if the fill was at a fair price, or if he received a worse price than deserved?  My answer is that we don't know. 

Last year, before the markets went crazy, whenever I entered an iron condor order, I was shown a counter-offer (my broker is InteractiveBrokers, IB).  That's no longer true, and I never know the true bid for a position I want to trade.  It's possible that $2.95 (or perhaps a penny or two higher) was the highest price anyone was willing to pay, but I have no way to know that.

2) Another sad possibility – and I know from personal experience that these things do happen – is that the order was so stale that it was no longer on anyone's radar screen.  Thus, when he 'freshened' his offer by changing the price to $2.95, there were enough buyers to fill his order.

The uncomfortable feeling one gets when filled instantly is that you didn't ask a high enough price.  I can assure you – that is a distinct possibility.  I've learned that when I refresh an order that's been in place for awhile, some strange things happen. 

In JC's situation, I found that if I increase my offer to $3.01, part of the time that new order is filled instantly.  I know that seems to be impossible, but it proves to me that stale orders are being ignored – as if the order had been canceled.  I don't understand how that's possible with electronic trading, but I can think of no other explanation for raising my ask price and being filled instantaneously.

As one would expect, most of the time that $3.01 offer goes unfilled and, after a few seconds, that's when I change the price to $2.95.  When that's filled instantly, at least I'm confident that I could not have received a better price for my trade (OK, perhaps a penny or two better).

Although I'd like to offer at $2.99 then $2.98 etc., IB charges a fee to cancel orders, making the idea of moving one penny at a time a difficult choice.  If your broker doesn't charge that fee, then by all means, move your bid or offer one penny at a time.

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8 Responses to Q and A. Cancel/Replace an Open Order

  1. Robert 04/29/2009 at 6:50 PM #

    Grr…
    I had a similar event occur today that really irked me. Mid-morning I bid $5.35 for an IC. That was a nickel below the mid-point for the position at that time. After several hours of sitting unfilled, I saw the mid-point for the desired position had moved to $5.50. I put in a cancel/replace order to move my offer to $5.45.
    Apparently, that brought my stale offer to someone’s attention because I first received a “Pending Confirmation of Cancellation” notice which lingered for about a minute and then I received an “Executed” notice for my $5.35 offer. My initial offer had clearly not been interesting until I electronically wiggled it.
    I thought my offer would have been sitting conspicuously at the top of an MM’s screen of unfilled offers. Doesn’t it work that way?

  2. Mark Wolfinger 04/29/2009 at 6:59 PM #

    Robert,
    I haven’t been on the floor in 9 years, and that was before electronic trading took over – so I don’t know exactly how it works.
    Obviously no one was intereted at the time you entered the order. But just as obviously, someone was interested at the time you canceled. I have no idea why the order was not filled automatically – but it’s reasonable to assume that these customer orders may require manual acceptance or rejection. And there must be some sort of time limit (established by trader) as to how long various orders are displayed.
    Maybe a current market maker will come to our rescue with the true answer.

  3. Dave 04/29/2009 at 8:22 PM #

    Today I placed 2 iron condor orders simultaneously, first with Etrade then with Thinkorswim (exact same orders- TOS is retirement account). I split the rather large spread 50/50 and TOS fired right off with a perfect execution. Almost 10 minutes later, after the 40c spreads had traveled within .01 of my offer several times, Etrade executed the calls only. Of course the market instantly sprinted away from the puts and when my semi-panicked chase was over the carnage totaled about $600 loss compared to the TOS execution. My “platinum rep” apologized and explained that Etrade didn’t have “it’s own” option market makers– the connotation I guess being being TOS was a bit more connected. Both brokerages have their strong (and weak) points but I thought it was an experience worth relaying.

  4. Mark Wolfinger 04/29/2009 at 9:08 PM #

    1) This totally unacceptable
    2) Your E*Trade rep doesn’t know what he’s talking about – platinum or tissue paper.
    3) Your order was not entered at E*Trade to trade with ‘their’ market makers. It was entered so that real marekt makers at the various option exchanges, plus all off the floor liquidity providers, could see that order. I have no idea what he thinks he was telling you, but you should tell him that he is full of crap. Ask him to which exchange the order was routed – and if it wasn’t ISE tell thim that in the future you will accept orders to ISE only.
    3a) My guess is that they routed the order to the exhchange that offers the highest bribe – oops, I mean payment for order flow. But even then – an ‘iron condor order’ cannot be filled on one side only.
    4) If you enter an ‘iron condor’ order, as you said, then they cannot execute only the call portion. Or did you enter a call spread and a put spread?
    5) If you did enter the order as an iron condor, then your broker has an error. The call fill is not yours and you should not have accepted it. I’m sure it’s too late now, but I would tell them you will accpet the trade if they split the error and give you $300 AND cancel all commissions from that trade. They will not agree, but you should try.
    Now, if you did enter the call spead and put spread as separate orders, then there’s nothing to be done. How you will enter orders in the future is something you will have to decide.
    6) I hate this. Question: Once the call spread was filled, did you stubbornly sit there and wait for the put fill, or did you attempt to reduce your put offer to complete the trade?
    7) Please let me know he answers. But I don’t understand how the platinum rep can tell you he is sorry and that you must take the fill on only one side of your order.

  5. Dave 04/29/2009 at 11:07 PM #

    My etrade order was placed as two separate spreads. I know– BAD– but I
    have been told by two different people at etrade it is the only way they
    accept them– not as complete iron condors (TOS of course is more than happy
    to do both legs simultaneously) believe it or not– although it’s a big
    hassle and a bit clumsy– it’s worked out OK with etrade– until today’s RUT
    attempt/ debacle. After I stewed on it all afternoon and came home to your
    response I just sent “Mr Platinum” an ultimatum: Full refund the wasted
    money or I’m gone. (I also scalp 700 to 1100 trades every quarter so it
    should be interesting to see if they shoot themselves in the foot on this).
    And, I didn’t want to mention it on your blog but the rep DID allude to the
    order flow as “maybe someone getting a bit greedy”.
    To your question “did you stubbornly sit there and wait for the put fill, or
    did you attempt to reduce your put offer to complete the trade” I will say I
    was terrified to see what had happen, pulled down my pants and chased it as
    fast as I could!
    Thanks for your response and the reinforcement of what I strongly suspected
    smelled rotten.
    Dave

  6. Mark Wolfinger 04/30/2009 at 6:37 AM #

    They will not refund the money. If you had offered some compromise, then perhaps…
    Next time you feel you have a bad fill, you must immediately take action to ‘fix’ the situation, and then request that they pay for the mistake. When your situation occurred, unless you can show that you made an effort to sell the put spread immediately, they are going to tell you that the loss is your own fault. Had you just paid very near the offer at once, and lost a small amount, they may have been more sympathetic.
    Still, it’s rather inefficient to trade with a company that won’t accept iron condorf orders. I assume they accept no 4-way spreads – and who knows what strategy will attract you down the road.
    Let me know how this works. I left E*Trade when they would not allow cash-secured puts sales in an IRA account.
    It’s also awkward to transfer an account with open positions that may require an adjustment during the transfer. Best of luck.
    You never did mention to which exchange they routed your order.

  7. Dave 05/01/2009 at 10:39 AM #

    Saga continued: As you predicted they didn’t even respond to my ultimatum. So I called to wire all cash from that account to TOS. After enduring an obligatory interrogation they gave me several final security questions “generated from random public information” which I promptly failed since I couldn’t remember the name of the county I lived in during a six month stay in New Mexico more than 20 years ago (I’m not making this up). I was told the only way I could remove funds from the account now was with a registered/ certified and notarized request letter. Having been supremely polite for all of my 14 years with Etrade as a maintenance-free client, I finally lost it, mumbled a few mean things and hung up on them. Much later my designated “Platinum Rep” dutifully called to regret the lack of initial response and offer the entire amount of the trade-gone-wrong refunded immediately… I’d like to think I’m smarter than what I said next, that maybe it was too much sugar in the mocha I’d just finished, but it exploded so quickly the brain never even had a chance to say stop; “keep the &#@*ing $600.00 I’ll never trade with your company again”. So there ya go, end of story! And, btw he did tell me they routed through ISE but “wasn’t surprised they let a 40c spread drift to within 1c of my offer, that they’d had trouble with them before”.

  8. Mark Wolfinger 05/01/2009 at 11:01 AM #

    1) How sad for everyone.
    2) Google the city and look up the county??
    3) Notarized letter? How disgraceful is that? They make it very difficult for you to leave – that’s their goal.
    4) Yes, I say mean things to automated telephone messages also.
    5) Surprised they offered entire $600, but customers are vauluable – especially platinum.
    6) Also surprised that ISE allowd one penny to keep them from trading with you. Perhaps order had to be ‘refreshed’ to get filled?
    Hope it works out better at TOS.