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How Good is Your Trade Execution?

I read in your blogs that your preferred underlying IC instrument is RUT. How often do you get good execution prices with RUT spreads? It's hard for me to get the "mid-price". Do you have any suggestions on execution prices?

Keiser

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Hi Keiser,

Short answer: I don't know how good the executions are.  This is primarily due to the fact that I trade options that are not very liquid.  They are low volume options, and I have no comparative data.

Details: My broker (IB) advertises that they achieve excellent fills, and offer evidence.  I choose to believe them.  However, I'm sure it only applies to single option (no spreads) that have a lot of public order flow.  My trades are almost certainly being made with market makers, or some other professional trader, and I can only get a good fill when they are willing to provide it.

I never try to get the midpoint on my credit spreads or iron condors, and I am happy to get 10 cents worse than mid.  I will go as far as 15 or 20 cents worse than midpoint – if I 'need' the spread for risk modification or when I want to exit to reduce risk.  When collecting the profit, I have more patience.

When trading with the market makers, I don't know how we can ever know what they are thinking or how they value the specific trade that we are trying to make. 

Sometimes when selling vega (for example), the market makers are short vega and are willing to pay up to get some positive vega.  When that happens we could get midpoint – or even better – for selling positions with positive vega.

If trading 100-lots, then those market makers are going to have some incentive to examine our orders and look for an appropriate hedge that allows them to take the trade.

When customers trade 1- or 5-lots, then it may not be worthwhile for the MMs to spend any time with our bid or offer.  My guess is that their computers are set with parameters that scan spreads.  In other words, their computers and the algorithms they set, make the trade decisions.  If that is true, we can never judge how good the fill is – but it will never be 'good.'

You could enter the same order with several brokers and see which one delivers the best execution.  I suspect that's a waste of time, but it is research and you may discover a path that saves significant money – if you have the time and patience to make that attempt.

My only useful suggestion is to know just what you are willing to pay (or collect) for the trade and not to go beyond that limit.  I understand that 'knowing' the limit is difficult – especially when we have no idea of the true bid/ask spread for our trade.  One of the serious defects with electronic trading is that customers do not get to see the real (inside) market.  We only see the published markets, and those are useless.

Side opinion:  When we enter bids and offers without a clear view of the real market, then we are becoming de facto market makers.  We lay our cards on the table and others can take or reject our trade. 

Thanks.  Good questions.

865

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