tag:blogger.com,1999:blog-6704573462403312459.post4637568821784105710..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: Liquidity liquidity everywhere but not a drop to drinkJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-6704573462403312459.post-35500754989378578212015-11-03T09:38:47.494-05:002015-11-03T09:38:47.494-05:00I do not know. Streaming inside bid-offer should b...I do not know. Streaming inside bid-offer should be unprofitable business. That is IMO market also, as market moves a lot there is a probability one will be left with a short stick. And even if-then the price of the option should be reflect the riggability, rendering it worthless strategy.<br /><br />But I'm not sure how you measure bid-offer at the time of the execution? With exchange traded stuff it might work, until illiquidity. Also most markets are working over-the-counter (OTC). Jussinoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-47798208995773879112015-10-24T21:56:13.344-04:002015-10-24T21:56:13.344-04:00In my illiquid experience, there is no such thing ...In my illiquid experience, there is no such thing as the ask. The ask price is typically the pipe dream of asset holders in a market for lemons. In reality, there is only the bid. The bid is the market of millions, the ask is just a handful of guys. Ironically, you are trying to buy at the illiquid price to solve the liquidity problem. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-3650978656982901272015-10-24T15:19:08.314-04:002015-10-24T15:19:08.314-04:00Good points.
I'm talking about standardized ...Good points. <br /><br />I'm talking about standardized exchange-traded products protected by margin held at a clearinghouse, different from the OTC stuff AIG was writing. Buyers of liquidity insurance would know that they have a good counter-party.<br />JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-54247870965580443862015-10-24T14:03:53.299-04:002015-10-24T14:03:53.299-04:00Rigging the bid ask spread could be a problem. Som...Rigging the bid ask spread could be a problem. Someone who has written a bunch of liquidity options may try to artificially narrow the bid ask spread by submitting a stream of bids and offers so that the options they've written lose value, allowing them to buy back the insurance at a cheaper price.<br /><br />However, they run the risk of being filled on the orders they are using to manipulate the spread, so I'm not sure how aggressive they can be on gaming the market.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-77436022544473455632015-10-24T13:36:34.641-04:002015-10-24T13:36:34.641-04:00It would be interesting to actually look at data o...It would be interesting to actually look at data on this. I expect it would parallel volatility. Lordhttps://www.blogger.com/profile/06747994571555237739noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-4155688408469968312015-10-24T11:54:45.187-04:002015-10-24T11:54:45.187-04:00JP,
Liquidity is a systemic (network) dynamic. Ca...JP,<br />Liquidity is a systemic (network) dynamic. Can a "part" within the network offer insurance against it? <br /><br />In other words, the put writer would have two choices. One, hold cash reserves equal to the potential drawdown caused by put exercises during a sudden liquidity event. Two, maintain lines of credit so that they could cover such an event. I would argue that the first option is probably not a viable business model, and that the second does not protect liquidity buyers against the bankruptcy of the put writer caused by lines of credit being withdrawn. <br /><br />Something similar to this happened with AIG in '08. As put writers on subprime risk spreads that ballooned in part due to illiquidity, they experienced a liquidity crisis. Diego Espinosanoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-87417452839436562602015-10-24T10:19:29.005-04:002015-10-24T10:19:29.005-04:00Really interesting proposal.
Would it be gameable...Really interesting proposal.<br /><br />Would it be gameable/riggable?? Could I buy a liquidity option, then make a silly high buy offer? (I don't think so, because the liquidity provider could then just turn around and sell them me back, but I'm not sure.)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com