Options order nibbling

[Sharkman]

So it looks like this problem has reared its ugly head again (or perhaps it re-emerged awhile ago, but I didn't notice as I only recently resumed options trading again in the last couple months, having taken a break from it for a year & a half or so after I went FIRE).

"Nibbling" is a term I use, for want of a better name, to refer to what I believe to be a nasty MM practice of filling a small fraction of a retail order, then leaving the rest sitting there. This soft locks the retail trader into leaving the order in place, because any modification to the order creates a new order (incurring another lot of minimum brokerage), letting the MM wait a bit and see if the market moves in their favour before filling more at a price that's now favourable to them, and if it moves the other way, they just leave it unfilled.

It's been a few years since it last happened to me (although as mentioned I stopped trading for 1.5 years or so over 2023-2024), but it happened again today. I was trying to trade 50 contracts, only for the MM to nibble away 1 and leave the other 49 sitting there. There were no other retail orders on the market depth at the time, only MM spreads, so I believe it was an MM, not another retail trader. Can't be sure though.

Whilst it's only a few bucks, it is rather annoying, and a few bucks at a time will add up if it keeps happening frequently. I didn't touch my order after that because I didn't want to move it in another tick, only to have them nibble away another 1 or 2, then have to move the remaining 47 or 48 in again, etc. Not to mention the recordkeeping hassle of partial orders.

IB does support "all or none" conditional orders, but it looks like the ASX doesn't (https://www.asx.com.au/documents/rules/pre-ntp_asx_24_procedures.pdf - section 4021.2 paragraph 9).

Has anyone who's been trading ASX ETOs during the last couple of years had this happen and if so, any ideas on what can be done to mitigate this kind of thing? Have you noticed certain patterns to it, as it'd have to be a behaviour that's been programmed into whatever algo they're using? I doubt it's a person behind a screen controlling those orders.

I do miss the old days when the lot size was 1000 though, back then the minimum brokerage was the same as the brokerage for 1 contract, so whilst nibbling still happened on occasion back then, it wasn't an issue (apart from a bit of recordkeeping inconvenience) to just keep moving the bid/offer until you got the fill.

 

[rolly1]

Ok so a couple of questions.It looks like it was a stock eto you were looking at trading.
1) Did the stock move into and out of the range quickly where the MM would fill you.
2) Which stock was it as there may not have been enough volume in md for mm to hedge hence why you only got filled slightly.
3) Which broker you use as IB charges per contract so doesn't matter how many transactions of your original order it takes to get filled.
4) Were you at mid or worse trying to fill the eto?

 

[Sharkman]

Underlying was NAB, so a very liquid name, but a relatively illiquid option (way OTM). However I frequently trade options that are relatively illiquid due to being way OTM, as usually (as is the case here) I look to close out limited reward positions (such as covered calls) if I can pay <20% of the premium I originally took in to do so, and this wasn't a problem for the last few years, until now. IIRC the last time I had this happen was around 2019 or so.

I use IB, which does charge per contract, but there is a minimum brokerage which is equivalent to about 7 contracts - usually it doesn't matter, but it does if you end up getting 1 contract nibbled - because if you then move the bid/offer in a tick trying to get the rest filled, that counts as a separate order, so now you've paid brokerage for 7 contracts to get 1. And this could happen potentially multiple times, if they wanted to get really nasty about it. If you leave the order untouched, there's no issue if they end up filling the rest of it eventually, but that may or may not happen.

As noted above, once somebody (and it may well have been another retail trader, I have no way of knowing for sure, but it didn't feel like it) nibbled off 1 contract, I got paranoid about them nibbling away 1 or 2 at a time if I kept moving the order, and end up having to pay multiple lots of minimum brokerage for a simple trade that I expected to get filled all at once (as has been the case for the last few years). So I left it untouched. The underlying was fairly steady hovering between 34.40-34.50 for the rest of the session, but the other 49 went unfilled. Normally I like to close out limited reward trades once I've scooped up 80% of max profit, but if this nibbling issue is once again a problem, I might have to adjust my tactics and start letting these run to expiry, and hope I don't get burned by it.

My order was near the mid at the time. Now to be fair, I do nibble at the spread myself when trading options ie. I will start way on my side, then move it in tick by tick at short intervals until it gets filled or it gets to a price where I don't want to trade at anymore. But if the MMs keep insisting on showing rubbish spreads like 0.76/1.02, it basically forces you to nibble, you will go broke if you persist in hitting the bid/offer into those kinds of spreads. If they showed something like 0.88/0.90 to begin with (which is often what you ultimately get filled at anyway when trying to work a spread like 0.76/1.02) I would probably just hit the bid or offer and be done with it.

 

[rolly1]

Underlying was NAB, so a very liquid name, but a relatively illiquid option (way OTM). However I frequently trade options that are relatively illiquid due to being way OTM, as usually (as is the case here) I look to close out limited reward positions (such as covered calls) if I can pay <20% of the premium I originally took in to do so, and this wasn't a problem for the last few years, until now. IIRC the last time I had this happen was around 2019 or so.

I use IB, which does charge per contract, but there is a minimum brokerage which is equivalent to about 7 contracts - usually it doesn't matter, but it does if you end up getting 1 contract nibbled - because if you then move the bid/offer in a tick trying to get the rest filled, that counts as a separate order, so now you've paid brokerage for 7 contracts to get 1. And this could happen potentially multiple times, if they wanted to get really nasty about it. If you leave the order untouched, there's no issue if they end up filling the rest of it eventually, but that may or may not happen.

As noted above, once somebody (and it may well have been another retail trader, I have no way of knowing for sure, but it didn't feel like it) nibbled off 1 contract, I got paranoid about them nibbling away 1 or 2 at a time if I kept moving the order, and end up having to pay multiple lots of minimum brokerage for a simple trade that I expected to get filled all at once (as has been the case for the last few years). So I left it untouched. The underlying was fairly steady hovering between 34.40-34.50 for the rest of the session, but the other 49 went unfilled. Normally I like to close out limited reward trades once I've scooped up 80% of max profit, but if this nibbling issue is once again a problem, I might have to adjust my tactics and start letting these run to expiry, and hope I don't get burned by it.

My order was near the mid at the time. Now to be fair, I do nibble at the spread myself when trading options ie. I will start way on my side, then move it in tick by tick at short intervals until it gets filled or it gets to a price where I don't want to trade at anymore. But if the MMs keep insisting on showing rubbish spreads like 0.76/1.02, it basically forces you to nibble, you will go broke if you persist in hitting the bid/offer into those kinds of spreads. If they showed something like 0.88/0.90 to begin with (which is often what you ultimately get filled at anyway when trying to work a spread like 0.76/1.02) I would probably just hit the bid or offer and be done with it.

Ultimately we trade with MM 99% of the time. Start at mid and go worse from there. You should never have to hit the bid or offer to get a fill. If you are worried about brokerage go worse of the mid straight up. Try not to trade itm options as the MM will want you to cross the spread more. Good luck.

 

[rolly1]

I forgot to ask what dte options were you trading as that can make a difference as well. I just remembered too I normally only trade the xjo options but I did do some GYG options on Monday. Only had to go half a cent of mid to get filled on the lot.

 

[Sharkman]

It was the May expiries, and well OTM, so it was indeed less liquid than normal, but I've been doing these all the time and it hadn't been an issue for a few years up until now. Yes that has been my experience as well, have usually been able to get the whole order filled within 1 or 2 ticks of the mid, so I thought this nibbling behaviour had been nipped in the bud. Since it appears to have cropped up again, and I've had a recent 1.5 year gap where I haven't been trading at all, thought I'd post my experience to check if others happen to have noticed this behaviour starting up again recently.

 

[rolly1]

It was the May expiries, and well OTM, so it was indeed less liquid than normal, but I've been doing these all the time and it hadn't been an issue for a few years up until now. Yes that has been my experience as well, have usually been able to get the whole order filled within 1 or 2 ticks of the mid, so I thought this nibbling behaviour had been nipped in the bud. Since it appears to have cropped up again, and I've had a recent 1.5 year gap where I haven't been trading at all, thought I'd post my experience to check if others happen to have noticed this behaviour starting up again recently.

Ok that explains it then front month is where the liquidity is anything after that bend over and pay the MM tax
I have noticed in the past week spi futures depth is very thin, alot of only single digit qty in the buy/sell side. Maybe that might have something to do with it as well.

 

[Sharkman]

Ok that explains it then front month is where the liquidity is anything after that bend over and pay the MM tax
I have noticed in the past week spi futures depth is very thin, alot of only single digit qty in the buy/sell side. Maybe that might have something to do with it as well.

Not necessarily true for what I often refer to as the big 6 - the 4 banks plus BHP and RIO. Anything out to 3 months usually has decent enough liquidity in those names. I did originally get the 50 contracts sold in one go near the mid (the trade where I got nibbled was me trying to buy back those 50 covered calls), though at the time I sold them it was near ATM. But I have been out of the game for a while, and as you say, maybe the macro situation has tightened things up a bit these days.

 

[rolly1]

Another thing you may have missed during your hiatus is that the ASX in its infinite wisdom has brought in a rule where retail can't trade any single leg options in the first half hour after the spi opens for the day.

 

[Sharkman]

Another thing you may have missed during your hiatus is that the ASX in its infinite wisdom has brought in a rule where retail can't trade any single leg options in the first half hour after the spi opens for the day.

Really? No I wasn't aware, but most of my trades tend to be in the last hour of the session, so no meaningful difference for me. Good to know in any case, thanks for bringing it up.