Dead Man's Switch: Making Options Markets Safer with Active Quote Protection
23 Pages Posted: 8 Oct 2020
Date Written: May 2020
Market makers play a central role in options markets, where they account for 99.9% of open orders. Providing liquidity at this scale is only possible because of quote protection (QP) mechanisms that limit how quickly open orders can be filled — say, in the event of a market crash or system failure. But existing QP mechanisms are severely flawed: they are time-window based, which limits the kinds of risk that can be mitigated; they lack a “dead man’s switch,” in that unwanted orders can be implicitly approved via inaction; and they vary subtly across exchanges. As a result, market makers are likely to quote wider spreads, quote less, or step back from the market entirely. Here, we propose ActiveQP, a simpler, safer standard for quote protection based on active two-way communication.
Keywords: Market Maker, Options, Micro-Structure, Trading, Finance, Risk, Risk Management, Regulation, Policy
JEL Classification: G10, G13, G14, G18, G20, G23, G28
Suggested Citation: Suggested Citation