Trade like a market maker?

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The problem with my spread order is that it is sent to the
market maker who supposedly provided the best price.

On the retail
front end, I can't see the market makers' quotes. Do you know how to
connect directly to liquidity (in a way that I can see MM's quotes)?

Another method I can think of is to come out with a good algorithm for
legging in. This is much complicated and I hope I would not need to go
this route. My opinion is, in order to get into more liquidity, I may
need to learn how to trade like a MM.



Hello John,

It's difficult to know where your orders are sent without asking your broker.  However, they are never sent to 'a market maker.'  The orders are send to an exchange, and that should be the one displaying the highest bid (or lowest offer).  Sadly that is not always true because some brokers accept bribes payment for order flow.

If you trade enough size, your broker will (gladly?) get a quote for your order.  When I was trading 100-lots of iron condors, I found that the people who provided those quotes were, to put it simply, out to cheat me.  In other words, when I tried to find liquidity, my broker (IB) could not have done me any worse than sending the quote request to the people they chose.

I no longer have access to such quotes (I trade much smaller size), nor would I seek them.  I know they are useless to me.  I blame IB for that (they asked the wrong 'liquidity suppliers' for quotes).

I look at the bid/ask spread for each leg of the iron condor as well as the bid/ask for at the iron condor itself. I then decide if I want to play.  If yes, I enter my order at a price I will accept.  If I don't get filled, so be it.

A few years ago, whenever I entered an order, the IB software showed (for 2-3 seconds only) a counter offer.  In other words, I had the ability to see the true market.  That allowed me to enter a low-ball bid to see the true offer.  That service is no longer available, and we are flying blind when entering orders.

I complained to IB that in reality, I am the market maker.  I am posting a bid (or offer) with no ability to see the true market.  "That's not fair" I tell them.  "Too bad" say they. 

So, I play market maker and hate it.  To  make matters worse, IB charges a fee to cancel an order and replace it with a better order.  Imagine – they charge me, the true market maker in this scenario, to make a better market.  It costs me cash to raise my bid or lower my offer.  It's an obscene system, but I don't see how I can do anything about it.  The overall cost to trade at IB remains untouchable for me.

If readers have suggestions or a work-around, please share.


1) You will not find a good algorithm for legging in.  In my opinion, there is no such thing.  You would have to know which way the market is moving to leg the first side of the trade.  And if you can get that part right, why would you 'waste' a good trade just to complete the iron condor?  Use that (impossible to build) algorithm to day trade and make millions.

2) You cannot trade like a market maker.  You are never aware of large orders that are being quoted.  You don't know anything about large spreads that are being shopped or sitting with the specialist.  Many times just knowing an order is there allows you to make a trade and then go get a piece of that large order.

You never get to buy on the current bid – and if you do, you will discover that it is no longer the bid and may even be the ask price when you are filled.

There may be books that explain how a market maker trades, but the MM's advantage is not available to you.



September 2010 issue now available

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10 Responses to Trade like a market maker?

  1. Marty 09/21/2010 at 8:49 AM #

    Hi Mark,
    In your experience trading iron condors with IB, how intelligent is their margin software? If I leg in (sell put spread, then sell call spread) will IB require margin for both positions, or is the software smart enough to recognize my true intent and cancel the margin requirement on my second spread?

  2. Mark Wolfinger 09/21/2010 at 9:10 AM #

    The software does not pay attention to ‘legs.’
    Every time you make a trade, the margin requirement for the entire portfolio is recalculated.
    If you are short a call spread, there is a margin requirement. If you then sell a put spread – same underlying, same expiration, same spread width, same or smaller number of contracts, then the margin will NOT increase.
    Obviously this assumes that previously held positions do not get in the way.

  3. John 09/21/2010 at 2:17 PM #

    Hi Mark,
    Thanks for your thoughtful blog post. My broker (TOS) told me that all spread trades are sent to MM at exchange. They have a screen showing all the quotes provided by multiple MMs, and they said they will send the spread order to the MM who provides the best price. Anyway, is the payment for order flow standardized, or MMs can decide how much to pay? If the latter is true, then there may be conflict of interest. On a side note, I am starting to think that in order to become really big, one has to become a MM sooner or later.
    On another issue, I heard that HFT may be able to provide better liquidity, but it is having trouble in the options market due to some legislation. Mark, do you have more info on this?

  4. Mark Wolfinger 09/21/2010 at 3:13 PM #

    I guess they are telling the truth, but sending the order to the market maker who displayed the highest original bid does not seem efficient to me. Especially for spread orders.
    I doubt many (if any) show their true highest bid. Just as anyone else, they barter. They show bids but are willing to go higher if they must.
    All I am saying is that the original highest bid may not be the final highest bidder. I’d want every MM to see my order – after the original bids have been made and the order is sent.
    I believe payment for order flow is from the various exchanges not individual MMs. But I don’t know.
    Of course there’s a conflict of interest. That’s why I call it a bribe.
    ‘Really big’ is not a well defined term. If you trade AAPL options, your 1,000 lot order is not going to be considered to be too big. Yet the order represents 100,000 shares of AAPL, or $28 million worth of stock.
    I don’t know how many 10,000-lot orders are received in the SPX pit daily, but you can probably find out. Maybe TOS can tell you. Do you plan to routinley trade >10,000 SPX spreads at one time?
    You can register to become an off-floor market maker if you get that confident.
    I know nothing about HFT. Period. But there is no way that the options markets would be dumb enough to take the risk that HFT – which is designed to pick-off other customers – will make traders so angry that they find another place to trade. HFT is the devil incarnate. They steal billions from the little people. This is a trading activity that is easy to forbid – all it takes is courageous legislators.

  5. Atindra Mitra 09/26/2010 at 9:46 AM #

    Dear Dr. Wolfinger,
    I recently purchased a book by Jeff Augen on the topic of “Trading Options at Expiration”
    I was wondering if you might have a list of additional articles and/or references on this topic
    Thank you for your consideration
    With best regards,
    Atindra Mitra

  6. Mark Wolfinger 09/26/2010 at 9:56 AM #

    Good book. Interesting insights.
    I don’t have much you would find useful. In my opinion, trading anywhere near expiration is far too risky, even though the reward potential is commensurate with risk.
    It’s not that expiration trading is a bad idea. It’s not a bad idea. But for me, and because a good portion of my readers consider themselves to be rookies traders, I discourage making the more risky trades.
    Thus, on this topic, the only material I have is all negative – filled with warnings. There is nothing that would enhance your trade performance.
    If you have some practice handling rapidly changing gamma positions, expiration trading does come with both good potential and higher risk, and there is no reason not to try – especially with Jeff’s help.
    My comment is: Be aware that the options you will be trading have a very high gamma, and can change from delta near zero to delta near 100 rapidly. And that even more true late in the trading day.
    Best of luck and regards,

  7. Javi 02/10/2012 at 7:53 PM #

    Hey everyone,

    One of the things I noticed, the 2 verticals have a value, and combined we got condor price, This is how I approach fluctuation. I select 8 verticals in the call side and the same verticals in the put side, at the same time I have them all selected as condors to see the condor price so I don’t have to do the math. When I see that one of the condors has a higher price than the points of the spread I sell the most expensive vertical, but I drop the price enough to get filled and immediately i sell a vertical of the other side with the highest price (doesn’t matter which one, just the most expensive) as long as both combined give me a price bigger than the spread points. Then I go and create a buy order to get both verticals back but I enter the order as a condor for a good dollar or more (SPX) Fluctuation will happen and one of those 2 spread will drop big time (same day – some time). I start with either the weekly or the front month and I do the same thing with the back month so I can have at least 2 trades going. Sadly, the buying power used in the 1st verticals sold will be enough to kill the trading power for the rest of the day, but with a few weeks of daily practice and enough desire you’ll get it and believe it or not it will add up to a very nice size account. Just doing a simple example, make 2 dollars/2 days in one contract the first week, next week you have enough for 2 contracts.. By the 3th month, you’re good to go.

    Anyways, I hope this helps, I was once pissed at the market, the market makers, regulators, my wife, everybody! but with patience and practice things can actually work out.

    Peace and love.

    PS: Hope someone understands my broken English.

    • Mark D Wolfinger 02/11/2012 at 9:10 AM #


      Selling verticals based on price only is not wise, in my opinion.

      More importantly, if you believe you can sell two verticals and collect more than the ‘spread points’ you are mistaken. Selling A 10-pont call spread and a 10-poInt put spread and collecting more than $10 is IMPOSSIBLE- when both verticals are OTM. If you could collect that much, you would have a guaranteed profit, and that never happens.

      I also caution you to recognize that these condor trades do not always earn a profit.

  8. Javi 02/12/2012 at 5:59 PM #

    Hey Mark,

    As we all know, many rules govern the mind of a trader, included but not limited to price, timing, IV and I believe most than all is understanding. I would have to take several pages to explain my trading system, not one of those things I would go around telling people for free. ( Not trying to sell anything in anyways shape or form) Also because it took me a few years to hate directional trades. I’m going to leave you with a very simple example of something I have traded. You can sell a condor for more than the spread points, how? By selling the 2 verticals in different times (same strikes – same expiration). How about selling 2 verticals that are equal or higher than the 5 points? I’ve done it many many many many times. It is not impossible it is just a matter of timing and perseverance. When you have some time, look at a quote of a condor (5 points) and notice how many times in a day the price exceeds 5 bucks. There is always a way my friend, always a way. Millionaires don’t play direction, they play numbers. (with many exceptions of course.)

    • Mark D Wolfinger 02/12/2012 at 8:27 PM #


      Selling the two spreads at different times is NOT AN IRON CONDOR trade.

      If legging is involved, it changes everything.

      BTW, if you do not want to disclose what you are doing for free, then please don’t comment here. This is a free blog.

      I am talking about call spreads and put spreads in which there is no overlap in the strikes. I am referring to condors in which the call and put spreads have a separation. If you are good enough to be able to time your trades to collect more than 5 points for a 5-point iron condor, then your profits are just too small. I urge you to take your profits rather than complete the condor.