Jason (jaypro22) wrote,

Why The AMEX Is Failing

Today there was a big controversy on the floor regarding a certain trade. I know few of you are excited about the specific details, but bear with me here. I'll try and be as succinct as possible.

A broker, let's call him John, traded 5000 options as a cross, meaning he represented both the buyer and the seller on the trade. Fine, no problem. A second broker, let's call her Jane, is alerted by her firm that this trade took place. Their client is interested in doing the trade, so Jane asks Joe if there's any more available. John says yes, that one of his clients will give up 2000 of the 5000 to Jane's client. Also OK so far. John and Jane both report to their clients that the trade is done. Then John tells Jane to go do the other half of the trade. What other half? Jane was not aware that there was another side to the trade. Problem. Jane's customer is not interested in that other half of the trade. Bigger problem. John's customer, however, is not willing to take back the trade he just gave up. Really big problem. John and Jane now have a $5,000 error. Here's where it gets sticky: Jane claims she's not liable. Since the trade was done outside of the trading crowd, it never "really" happened. This is tecnhically correct, since no trade is legally permitted to occur outside the crowd. But Jane, if it's illegal to trade outside the crowd, what exactly were you and Joe just doing over there in the corner? It sure sounds like a trade to me. Jane, are you telling me that you're admitting to doing something illegal in order to weasel out of your half of a $5,000 error? Does that mean that if I steal a car and drive into someone's pool I shouldn't have to pay the damages because techncially I should never have been driving that car in the first place?

Now, this whole situation was ruled on, and appealed, and appealed again, and then again, and is now being sent to arbitration. What I want to know is why haven't Joe and Jane been disciplined for trading outside the crowd? This happens to be a really big deal. Trades must be consummated within the trading crowd because, if they weren't, customers would have no way of knowing if they got a fair price. Since the brokerage firm is also representing themselves in this case, it's in the firm's best interest to give the customer as bad a price as possible, since those losses are realized as profits by the trader on the other side. It's the same reason why stock must always be traded on the stock exchange and nowhere else - transparency of markets allows for fair trading.

What got me livid, though, is the fact that nobody on the AMEX seemed to be upset about this. None of the other traders or specialists realized the precedent this sets. If you allow trades to go up between brokers outside the crowd, then you might as well just let the broker booths phone each other. And if you're letting the booths phone each other, you may as well have the firms contact each other directly, without even bothering with brokers at all. At that point there is exactly zero transparency of markets. Customers have absolutely no recourse against their brokers taking complete advantage of them. Something like this would never be allowed to take place on the CBOE. But since the AMEX is controlled by brokers, no trader or specialist is willing to take a stand against abuse like this. Frankly, if this is how the AMEX is going to treat blatantly illegal action, we might as well close the exchange now.
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