Thread by @VolSignals

Today MIAX busted all trades within a 15 min. window

Technically 14 minutes, 45 seconds and 686.121405 milliseconds (but who's counting?)

For most customers it's just a minor pain but it's a nightmare for a market maker

(short thread)

1 / What does "busting all trades" mean?

The exchange literally cancels all trades executed within this window.

15 minutes is an eternity.

And while TRADES are cancelled,
hedges are not.

2 / We hedge (or net) immediately at execution

so imagine...

I sell 500 puts at 11:20
system sells shares at 11:20:00:275.634331
system buys options to cover sales

book "balanced"

and on and on and on and on
racking up a ton of sequences just like this in that window

3 / Now what?

That 15 minute window is an insanely long time for a MM desk

That's a lot of time for:
✓ spot price to move
✓ vols to change
✓ positions (and hedges) to accumulate

that's all fine if you're hedge, but this "bust removes half of the equation.

4 / Here's a real example of a one-off I've dealt with myself

I'm running a quoter, and get hit on 134 lot of deep ITM puts $4.5 below theo where the call strike is worth $0.15

...a gift of a trade, and risk free once it's hedged

5 / system buys 268 minis against this 100d put

once hedged I basically have locked in $60,300 before costs and some basis hedging (trivial here)

market drifts lower a few dollars, a few more...

support calls over to the desk:

"Cboe's calling about a 134 lot of puts"

6 / "Customer is busting, says it's an error"

What I'd like to say:

7 / turns out you don't really have a choice (as MM).

The reality:

8 / ..not really, it's a cost of doing business

but it's brutal and often pretty suspicious

I have no trade, ergo no reason to own 268 ES from $12 higher. Not only do I NOT have any edge on the original trade- but the delta is a pure puke.

268 * 50 * -12 = -$160,800.00

9 / this isn't that frequent but it's rarely in the MM's favor

Often times it's an obvious error but sometimes they get pulled in wide market conditions when it's not easy to prove the rule

This MIAX issue was a system wide issue- even more rare, impacting loads of trades...

10 / I can only imagine the clerical fire drill after getting this notice.

Unknown risk on the line.
Suddenly you have to freeze systems, manually spot check positions against removals, pull the trades, refresh the position, hedge new delta, run PNL,

and last but not least

pray.