Market Makers in Equity Options Are Vanishing .While trading remains weak, many firms can’t afford costs of keeping their technology competitive.

Barron's reports:

Of all the ways to make money on Wall Street, few are currently harder than options market-making. Implied volatility is historically low, so profit margins are almost nonexistent in most trades. Exchange rules exacerbate the difficulties. Dealers must post bids and offers in Byzantine market structures that technology has degraded into shooting galleries for ultrafast computers.

The intense operating pressures have forced some dealers to sell or shutter their firms. Others are contemplating second careers. It has simply become too expensive to perpetually tune trading systems to operate near the speed of light. Without fast machines, dealers miss lucrative retail orders. They’re left with orders no one else wants, or with the “toxic flow” from institutional investors who have informational advantages over just about everybody.

Those forces have percolated since electronic systems emerged in 2000 to challenge the traditional open-outcry trading pits. In early May, they crescendoed. Interactive Brokers (ticker: IBKR) agreed to sell Timber Hill, the first options-trading firm to use computers to price puts and calls, to Two Sigma Securities, part of a $46 billion hedge fund. Terms weren’t disclosed.


The deal, likely to close in September, was unexpected. Few people foresaw a successful quantitative hedge fund becoming interested in options market-making. After all, Timber Hill’s profits have slid in recent years, and Thomas Peterffy, Interactive Brokers’ billionaire founder, has criticized exchange rules for putting dealers at a disadvantage to small, predatory investors with faster computers.

Imagine that.