Limit Order Competition and Pro-Rata Options Allocation
Summary
A trader describes trying to sell out-of-the-money puts in an illiquid options market with a wide bid-ask spread. After placing a limit order inside the spread, they observed other sell orders move to the same price when they changed their own quote. The episode raises the possibility of algorithms tracking displayed orders, but it is only an individual observation and does not establish what caused the quote changes.
The responses explain that pro-rata allocation at some options exchanges can reward market makers for matching the best price, since they may receive a share of executions without improving the quote. Another response describes how a market maker might quote just behind an existing price to retain execution chances while seeking a better margin. The discussion illustrates how allocation rules shape displayed liquidity and incentives to improve prices. It gives no exchange-specific details, execution records, or evidence that the observed orders were algorithmically shadowing the trader.
Key ideas
- Pro-rata allocation can give multiple participants a share of trades at the same price.
- When matching a quote is enough to participate, market makers may have less incentive to improve the price.
- A market maker may quote one tick behind a displayed order to seek more margin while retaining fill chances.
- An observed sequence of quote changes does not by itself prove that an algorithm tracked a trader's order.
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Full text
# Algo's Shadowing Limit Orders # Algo's Shadowing Limit Orders So I was trading the option contracts on NLY (Annaly Capital Managment) today. The stock took a big dip today which piqued my interests in selling some OTM puts. Since the options market on this particular stock is not a very liquid you have very wide bid-ask spread making it tough if you want to get your order filled. When I put in my limit to sell the, quote on the October 11 strike weekly's with 28 DTE, were .06x.10, with both the bid and offer 350 contracts deep. I put my limit on .09 to make it more competitive, put me at a 19 vol. The market traded for a while without fill and as time passed, I started seeing more limits dribbling down towards my .09 price, albeit the biggest blocks were still at .10, so a penny above me. To play it a little more conservatively, I decided to move my limit a penny up in case the market dropped some more. I want to note, that the limit orders to sell were firm at 10 cents all day as I watched the time and sales. ALL IN BEHOLE at the EXACT same instant I lifted my offer... all the limit orders to sell at my .09 price, were all pulled out and moved to .1 as well . It couldn't have been some human trader. Was there some algo shadowing my order? ## Answer by Louis Marascio (score 4, accepted) https://quant.stackexchange.com/a/14725 There's nothing nefarious going on here, it's simply a market maker ensuring they get their fair share (Hah!). Pro-rata allocation at many options exchanges mean market makers simply have to match your price to get a piece of the action. This is a good demonstration as to why that is bad for market structure since the incentive for a market maker to improve price is reduced. ## Answer by Svisstack (score 1) https://quant.stackexchange.com/a/14724 When market is illiquid and market maker want bid price X in book where first order, for example your best bid is at X-Y, then market maker quoting not X, because it not makes any sense, it quotes X-Y+tick and have same fill probability but makes p = X - (X-Y+tick) = Y-tick more profit. You should trade by some order management layer what should play with him in book, when you are as equal fast then execution probability will by equal divided too.
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