Booking an Options Order

Options Trading Topic: Options Order Book

Dear Options Trading FAQ:

I got one for ya. Two identical option trades with two different brokers (same option and price limit, but different amounts - 10 contracts and 5 contracts). No restrictions on either. 10 lot order given to broker #1 at 10am; 5 lot entered to Broker #2 at 10:45 am. Now, only one order gets filled: the one for 5 contracts, placed with Broker #2. How is this possible?

Love,
Switching all funds to Options Broker #2

Dear Switcher:

Great question. I'm going to feature it on the usenet post today if you don't mind. I've seen this happen in the past and this is what I've been told by the floor: The answer has to do with a lot of things, one of which is whether or not the order was "booked".

Here's what may have happened if it was an OEX order on the CBOE: The first broker does not book the order - instead he holds the order in the crowd (We'll discuss why later). The second broker enters his 5 lot onto the public order book. A sell order comes along at your limit. On this floor, that order must be filled off the book first, so the 5 lot sell order placed by broker #2 is executed while the first broker is still representing your 10 lot buy in the crowd. In this case, Broker #2 got the job done due to his use of the "book".

So why aren't all orders put on the book? Simple, the executing floor broker (his firm) makes more $ on orders that he executes directly. It costs him to leave orders on the book so he prefers to keep most orders in his own "deck". This is not the only reason, but a prominent one.

What should the public customer do? You can ask your limit orders to be "booked" when you place your order. Some firms may give you an attitude but it may mean the difference in an execution (as in your case).

Any downside to booking an order? Yes. If you need to change your limit (to a market order, or example), it will take longer to execute because the broker will have to find and cancel the book order first. The process mayl take longer than changing an order kept in the floor broker's pocket. In the meantime, the market on the option may have changed significantly.

Note: This scenario was for the OEX options only. Other floors have their own rules regarding public order priority. Call the option exchanges for floor procedures.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Broker, Options Order

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