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Financial Literacy

Why Choose A Full-Service Broker: Get Your Option Prices Filled Everytime

Why Choose A Full-Service Broker: Get Your Option Prices Filled Everytime

by Karim Rahemtulla, Options Expert
Tuesday, April 12, 2005: Issue #199

A few weeks ago, I wrote about the “secret bid” that sometimes crops up when you place an order in the options marketplace. This “secret bid” appears when you place an order to buy an option at a price other than the offer. For example, let’s say an option is bidding 5 cents and offering 20 cents. You decide to bid 10 cents. And as soon as you put your order in, a magical bid order appears alongside yours.

What the market maker was trying to do was to buy the options at 5 cents with no competition. However, as soon as you showed up with a reasonable bid, he showed his real cards. There isn’t a lot you can do in this situation, and the chances of you getting filled before the market maker are slim to none.

On another type of order, however, there is something you can do. I’m talking about cases where you simply don’t get filled, even though the option hit your bid price. When that happens, you can take your business to the ONLY person on the planet who can help when you don’t get filled: the full-service broker.

Let me explain, starting with an example…

Don’t Accept this Line of BS from Your Brokerage

Let’s say you see an option trading at 5 cents on the bid and 20 cents on the offer. You put in an order to buy at 20 cents expecting to get filled. However, you don’t get filled.

In fact, your order is in for 10 minutes, the offer doesn’t change, and you still don’t get filled. Then all of a sudden, the offer moves higher and your order is now basically in limbo.

If you get upset and call your discount broker, he’ll probably say one of the following:

  • There was no activity in the options so there is no real price.
  • The order was directed to a different exchange and now the offer has moved up.
  • The options market is not the same as the stock market and there is nothing we can do.

Insisting on Your Rights… What Rights?

Now, most people would just hang up at this point and swear that the market was fixed.

What is your remedy? As a reader who sent me a letter pointed out, you could ask the broker to provide you with a historical record of the bid and offer and a record of what time you placed the order to see if you are OWED A FILL.

This sounds wonderful, right? There is no doubt that you placed the order when the price was what you thought it was.

The broker, after much hemming and hawing, might then produce a time sheet that shows your order indeed was placed while the offer was where you thought it was. This confirms that you’re owed the fill!

Not so fast, he’ll say. Just because the order was placed and it has been recorded as being placed does NOT mean that you will be filled. Period.

And that’s the end of the debate…

You can argue till you are blue in the face, threaten to pull your account, speak to a manager and even threaten to call the SEC. But you still will not likely get filled.

It turns out that in the options market you are at the mercy of the market maker. And unfortunately, the level of regulation that exists in the stock market just does not exist for the options market. I hate to say that, because options are my bread and butter, but it is the truth.

The Solution: Why Full-Service Brokers Might Be Worth It

So what can you do? Well, you can dump that discount broker and go with a full-service broker instead.

Full-service stock broker fees are higher, yes, but that’s exactly what gives them greater incentive to go to bat for you and argue your case with their trading department.

At discount and online brokers, you are just a number and that is how you are treated for the most part in a dispute. Not so with full-service brokers.

In order to earn that extra money, they’ll sometimes go the extra mile for their client (you). In some cases, if you are a good client, the broker will actually eat part of the cost of the trade just to make you happy – yes, they will actually dip into their own profits to make your trade work. (Of course it depends on the size of the trade and the amount of money involved.)

So while it might be hard to stomach the fees, they might seem cheap compared to the opportunity cost of NOT being filled.

Full-Service or Discount, Let Them Know When They Screw Up!

Finally, if squawking long and loud doesn’t get your orders filled – regardless of whether you use a discount or full-service broker – it’s not useless, either.

I believe that the days of market-maker manipulations are numbered in the options world. As more people get involved in the market and volumes increase, so will complaints. And it is these complaints that ultimately get the regulators involved.

In this case, more regulation is sorely needed to increase the level of confidence in the options market.

So the next time you are owed a fill, don’t back off lightly, make a case out of it – you may not get satisfaction, but maybe the pressure from one more complaint could finally make the options market come clean.

Great Trading,

Karim Rahemtulla


About

With more than 20 years of experience, Karim has mastered the subtle art of options trading. What we admire about him is his ability to score huge gains while minimizing the massive amount of risk that often comes with options. Beyond his expertise in options trading, he is also the author of the best-selling book Where in the World Should I Invest? He publishes weekly about smart speculation in his latest free e-letter, Trade of the Day.

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