A former CBOE Designated Primary Market Maker (DPM), The Admiral, explains what High Frequency Trading (HFT) is. Specifically, the admiral explains what the purpose of high frequency trading and how big firms like Goldman Sachs, JP Morgan, and Morgan Stanley take advantage of technology placed near the exchanges. Just 5 years ago, program trading, or algorithmic trading, was only about 30% of the market trades. Today, program trading dominates with 75% of the trades occurring every day. Because so much of the order flow is based on program trading, when the programs stop their trading and providing instant liquidity, the market has a void where other market participants cannot equalize their trades with other options and equity instruments, causing events such as the flash crash. This is why understanding the equalities that the Admiral has been mentioning since the first class of this series, and is the focus of this 4th class.
This an excerpt from the "Trade Options like a DPM Webinar #4: Synthetics & Equalities - http://hamzeianalytics.com/pow_register.asp
"SYNTHETICS / EQUALITIES" OPTIONS WEBINAR DESCRIPTION
A financial instrument that is created artificially by simulating another instrument with the combined features of a collection of other assets.
ABOUT "THE ADMIRAL"
The featured speaker, whom we affectionately call "The Admiral," was a Designated Primary Market Maker (DPM) on the floor of the CBOE for five years. Although we're not using his real name (so don't ask!) suffice it to say that we consider him to be one of the most knowledgeable option traders on the planet. As a floor trader in the '80s and '90s he did the opening options rotation for 5-25 stocks the old-fashioned open outcry way—meaning he opened each option strike price for each of these stocks within the first 30 minutes of trading, both calls and puts.
That meant he had to price more than 500 option strikes, plus as a market maker he traded and kept the markets current. As a DPM, technology brought forth auto-quoting of option series, but pricing of those quotes remained his responsibility. Trading 1 million shares of stocks and 50,000 options contracts was a normal day for him. In 27 years at CBOE, he has traded through the crash of '87, the smaller crash of '90 and the tech bubble in 2000. He has traded three-digit volatility and seen every possible market environment imaginable. So, if you're going to learn options, it might as well be from the very best.
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