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I had tried to sell my GDXJ options @ 12.80, I saw there was a fill at 12.95 but none of my options were sold. When I called the broker they said option spreads are given priority. I can understand if the option was buying/selling @ 12.80 and option spreads get priority but not when I am offering to sell at a lower price. I don't see how the person willing to buy the options would not get filled at my lower price!

user44069
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1 Answers1

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Here is one possible reason :

Your broker has placed your order on the NYSE ARCA exchange. This is just one exchange that will be trading in GCXJ options. The others exchanges are the so-called virtual exchanges. Brokers will be connected to the ECN (Electronic Communications Network) that connects all exchanges in a single quote system, but if the trade is a proprietary/in-house trade and no client is involved in the transaction, then the broker may chose to fill the order specifically on one of the virtual exchanges. The best quote available on the chosen virtual exchange was 12.95 and that was the fill executed. If the executing broker was executing the order for a client, then they would have been obliged to fill the order at the best price available (your 12.80), but if they are not executing the order for a client (i.e., an in-house/proprietary trade), then they are free to fill the order on any exchange they choose.

You might ask - Why would a broker chose to execute a trade at other than the best price available? Well, the brokers that have set-up the virtual exchanges in competition with the traditional exchanges (NYSE ARCA etc...) have a vested interest in the success of their virtual exchange and may chose to place in-house/proprietary orders outside of the ECN quote system by placing the order directly with the virtual exchange that they part own with other brokers, for the obvious reasons such as boosting exchange volumes and minimising exchange related execution fees.

not-nick
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  • Reg NMS prevents the behavior that you described. At least in the blatant way that you described it. https://en.wikipedia.org/wiki/Regulation_NMS –  Jun 12 '16 at 20:03
  • @Brick What rule in the NMS regs prevents a proprietary trader choosing a counterparty? Those who setup virtual exchanges such as Nomura's Instinet, do so specifically to handle their in-house trading. – not-nick Jun 12 '16 at 20:16
  • What you described seems to violate the Order Protection Rule. The best available quoted price needs to be taken. Page 22, here: http://www.sec.gov/rules/final/34-51808.pdf Possible that I misunderstood your answer, but there is no absolute free choice in choosing a counterparty, as your answer seems to imply. –  Jun 12 '16 at 20:28
  • @Brick I'm pretty sure that these rules apply to brokers transacting business on behalf of clients, not on their own proprietary trading. The NMS regs are to protect investors. – not-nick Jun 12 '16 at 20:33
  • @Brick Having re-read my answer, I can see that it may have been loosely words with regard to the role of proprietary trading. I have updated the answer to make this aspect clearer. Thanks for pointing it out. – not-nick Jun 12 '16 at 21:04