A Cautionary Tale: Double-Check Your Option Orders

options

When someone steals from you, the stolen thing itself sometimes bothers you the least. It’s the feeling of being violated. It makes you feel diminished, demeaned, and angry.  And when you know you’ve helped the thief, it makes it even worse.  It’s bad enough to have your house burgled (yes, that’s the right word), but so much worse when you know you left the front door open.

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The other day my trading account showed a big loss because a call option I was short (versus a long position in the underlying stock) was being marked to the offer side of the market and the offer was ridiculously high–$5 when it should have been right around $1, based on recent trading history and the current stock price.  Seeing this, I wanted to offer a few more options at what I thought was the right price—a price where I’d be happy to sell but where I wouldn’t think the buyer was getting ripped off. I tried to enter a sell order, on my online account with a very well-known national firm, at about $1.15 per contract.

The website, thinking it was protecting me from making a costly error, wouldn’t let me enter the order because it was too far below the “real” offer. I realized I might have to enter a few interim orders at $4, 3 and 2 to trick the system into letting me put in the right one—I figured it would only let me undercut the current offer by about $1 at a time, even if the current offer had no relationship to where a trade was likely to take place.

I put my order in to sell at $4—or so I thought.

Oops.

I’m sure everyone who uses an online trading system, now and then, has either come close to entering a buy while meaning to sell (or vice versa) or actually done so. This time it happened to me. Usually, in liquid markets, the trading loss involved in fixing the mistake is pretty negligible. This time it wasn’t.

My erroneous $4 bid was, of course, hit immediately. As soon as I realized what had happened I called my brokerage firm and asked them to see if the option trader on the other side would be willing to bust an obvious error. Yes, I left the door open, and yes, I should not have. But does that make it right to steal from me?

Well, the counterparty, a market maker on the Philadelphia Stock Exchange, refused to break the trade, saying that my order had been “legitimate” and that it was within the context of the market.

The only reason it was within the context of the market was because of the deceptive $5 initial offer. It is a license for market makers to steal from people who make honest slip-ups. It should not be permitted.  This is the kind of thing that happened during the flash crash of 2010.

I’ve done enough trades, professional and personal, over the years that I guess something like this was bound to happen.  That said, I of course am the first to blame for not being more careful. Still, consider this a warning—don’t expect your trading system to catch your occasional slipup. And beware option market makers, especially those on the Philly.

Maybe—just maybe—there was something to be said for real, live, flesh and blood brokers after all. Is it too late to bring them back?

 

 

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