Dead Man's Switch: Making Options Markets Safer with Active Quote Protection

23 Pages Posted: 8 Oct 2020

See all articles by Sandor Lehoczky

Sandor Lehoczky

Jane Street Group

Ellen Woods

Jane Street Group

Matthew Russell

Jane Street Group

Mina Nguyen

Jane Street Group

James Somers

Jane Street Group

Date Written: May 2020

Abstract

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

Lehoczky, Sandor and Woods, Ellen and Russell, Matthew and Nguyen, Mina and Somers, James, Dead Man's Switch: Making Options Markets Safer with Active Quote Protection (May 2020). Available at SSRN: https://ssrn.com/abstract=3675849 or http://dx.doi.org/10.2139/ssrn.3675849

Sandor Lehoczky

Jane Street Group

250 Vesey St
New York, NY 10281
United States

Ellen Woods (Contact Author)

Jane Street Group ( email )

250 Vesey St
New York, NY 10281
Japan

Matthew Russell

Jane Street Group

250 Vesey St
New York, 10281
United States

Mina Nguyen

Jane Street Group

250 Vesey St
New York, NY 10281
United States

James Somers

Jane Street Group

250 Vesey St
New York, NY 10281
United States

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