I am all for what is happening on the Eurodollar option pit. Market makers are protesting - by refusing to enter the pit and make markets.
The catalyst for this was yesterday’s large block trades. Those trades gave up some serious edge – they essentially allowed one firm – most likely DRW to avoid the process of price discovery and deprive the market makers in the pit an opportunity to compete for the order.
This process of destroying the price discovery process has been going on ever since the advent of e-platforms, especially and acutely where option trading is concerned. Making markets more efficient and competitive is on the good end of the spectrum. However on the other end of that spectrum - the stealing of price information and the bad behavior that result – is way too prevalent.
A number of brokers very actively try and avoid transacting business in the trading pits in order to avoid paying commissions and exchange fees. Actually mostly just to avoid paying commissions: as the exchange still gets paid whether the order is “crossed” uncompetitive on the trading screen or in the pit. What they do not avoid is obtaining price information from the trading pit – and then using those prices to execute the trade without letting the market makers participate. Why? Because the brokers now charge a fee to “off floor” market makers that want to get that edge. This practice of “paying for order flow” has been going on for quite some time. Brokers especially in Europe are constantly checking where prices “should be” by soliciting quotes from the trading floor – and then they look to “cross “ the order on the screen often collecting fees from both the buyer and the seller on the transaction.
They just had the first bit of coverage from the floor - and the brokers made the point better than I have - they point out that the floor has to trade within the price range quoted - again via price discovery in an open transparrent setting - as opposed to the "call around" market where execution can occur outside the prices "discovered" in the open transparrent market.