Peterffy: Options Market Making ?”Not A Viable Business” in 2015
Thomas Peterffy is the Founder and CEO of Interactive Brokers. He is also the founder of Timber Hill – one of the longest-running market making firms in the options market. Thomas joined our Trading Tech Talk program to discuss many topics including the numerous problems facing options market makers in 2015. When asked if he would re-enter the market making business in 2015 his answer was surprising.”Absolutely not” he told Trading Tech Talk host and Options Insider CEO Mark Longo. “Maybe I would consider becoming an HFT. That’s a possiblity…But as a conventional market maker it’s not a viable business for a newcomer.”
You can hear the entire interview here.
Among the numerous reasons that it doesn’t pay to be an options market maker, the rise of algorithms are certainly a huge factor. ?Case in point, on May 29, at 1:10:15 pm a perfect example of why it?s so hard to be a market maker happened.
That day a trader on multiple exchanges bought?570 Humana (HUM)?May 180 Calls (exp. 5/29) for $0.25. The calls were expiring in less than three hours. This was a capital outlay of $14,250. At the time of the trade, HUM common stock was trading at 177.20, and trader would need HUM to rally $3.05 before the close of trade that very day to break even on his call purchase.
At the exact same second as the first purchase, a trader on multiple exchanges also bought?470 HUM May 177.50 Calls?(exp. 5/29) for $0.55. These calls were also expiring in less than three hours. This was a capital outlay of $25,850. This trader would need HUM to rally $0.85 before the close of trade that very day to break even on his call purchase.
Within seconds of these weekly options purchases, news broke that Humana was considering a sale of the company. Within minutes, the stock was trading as high as 217.57, or higher by $40.37.
The May 180 Calls (exp. 5/29) were now worth $29.00?a profit of $28.75 per call, or a total net profit of $1,638,750 on the 570 calls purchased seconds before the news broke.
The May 177.5 Calls (exp. 5/29) were now worth $32.00?a profit of $31.45 per call, or a total net profit of $1,478,150 on the 470 calls purchased seconds before the news broke.
This is likely a case of an algorithm being able to read a news story faster than an actual person, and buying approximately 1,000 calls to get ahead of the rest of the trading community.
The computer system turned an “investment” of $40,100, into a profit of $3,116,900, or 7,773%, in minutes.