Why Unusual Whales does not carry an 'Below Bid' or 'Above Ask' filter
Unusual Whales does not have a filter for “Below Bid” or “Above Ask”. Why not?
While other flow services constantly highlight these trades, here’s what you need to know.
TLDR
Trades can execute outside the bid-ask spread without indicating urgency or conviction. This happens through standard exchange processes:
- Exchange auctions (“Facilitation ISO”): Large orders split across exchanges at different prices
- All-or-Nothing Orders (“Solicitation ISO”): Large orders that fill at negotiated prices
- Floor Trading: Manual execution delays can result in prints outside the current NBBO
That’s the essential insight. For detailed examples and mechanics, read on below.
Facilitation Intermarket Sweep Orders
No two option exchanges are exactly the same, so the naming and exact process may vary from exchange to exchange, but the concept of a “Facilitation Intermarket Sweep Order” is common. On Cboe exchanges this process is referred to as a Sweep and Automated Improvement Mechanism (or a “Sweep and AIM”). Let’s explain this process, which will be abbreviated Facilitation ISO, with an example.
A hedge fund wants to buy 3150x LMT 425 Puts expiring March 21st, 2025 and is willing to pay 4.75 per contract at most. Their prime broker, an investment bank like Goldman Sachs or JP Morgan, is willing to be the counterparty on this trade, which means the bank is willing to sell the complete order to the hedge fund but must comply with Regulation NMS for execution. Let’s take a look at the bid/ask spreads across the exchanges:
- Bank’s Preferred Exchange (Exchange #5): 4.20 x 4.75
- All the other Exchanges combined, called Away Best Bid or Offer (“ABBO”): 4.25 x 4.40
The ABBO is 4.25 x 4.40, and in this case the ABBO is also the National Best Bid and Offer (“NBBO”). Remember, this is a combination of many exchanges and may be constructed from a bid on one exchange and an ask on a different exchange.
The prime broker submits a Facilitation ISO and the auction is broadcast to all market participants for 3150 contracts at 4.75. In less than a second, four responses arrive:
- Market Maker A offers 50 at 4.30 on Exchange #1
- Market Maker B offers 200 at 4.40 on Exchange #2
- Market Maker C offers 150 at 4.50 on Exchange #3
- Market Maker D offers 92 at 4.60 on Exchange #4
- No other responses
So each of the four Market Makers fills a portion of the order at an improved price on different Exchanges and the bank fills the remainder of the order, 2658 contracts, at 4.70 on Exchange #5.
When these transactions show up on your Flow Feed screen, many of them (Market Maker C, Market Maker D, and the prime broker) are going to show up as “Above Ask” because the NBBO was 4.25 x 4.40. Does that mean this trade was extremely urgent or high conviction? No – all we are seeing is the result of a multi-exchange auction getting filled efficiently.
(Note: why does the prime broker prefer one exchange over another? Fees vary from exchange to exchange and certain exchanges provide a small rebate to liquidity-providing members, so at any given time the prime broker may prefer to do business on one exchange more than another.)
Solicitation Intermarket Sweep Orders
The Solicitation Intermarket Sweep Order, which will be abbreviated Solicitation ISO, can lead to similar outcomes. Again, let’s walk through an example.
A hedge fund wants to sell 1650x META 715 Calls expiring February 14th, 2025 at a minimum of 9.50 per contract. The fund contacts their prime broker, an investment bank like Goldman Sachs or JP Morgan, to execute the trade, but the hedge fund adds another constraint: it must be executed all-or-nothing. (“Fill or kill” is sometimes used to describe this criteria.) The bank does not want this particular risk on their portfolio. Let’s take a look at the bid/ask spreads across the exchanges:
- Exchange 1: 9.40 x 9.90
- All the other Exchanges combined (ABBO): 9.65 x 9.85
The ABBO and NBBO are the same in this example at 9.65 x 9.85. The bank submits a Solicitation ISO and the auction is broadcast to all market participants for 1650 contracts at 9.65 including the “fill or kill” criteria, and two responses arrive:
- Market Maker A bids 1650 at 9.35 on Exchange 2
- Market Maker B bids 1650 at 9.55 on Exchange 1
Market Maker B’s bid meets all the criteria and is a price improvement over the Best Bid on Exchange 1, so the Solicitation ISO is successful and the trade is executed between the hedge fund and Market Maker B on Exchange 1 at 9.55 per contract.
Just like the Facilitation ISO, when this Solicitation ISO transaction appears on your Flow Feed screen it will show up as occurring “Below Bid” because the NBBO was 9.65 x 9.85. Does this mean that the trade was extremely urgent or high conviction? Again, no – all we are seeing here is the outcome of a unique order criteria (“fill or kill”) executing at a price negotiated between parties.
Floor Trades
Did you know that open outcry trading floors still exist? It’s true – some trades, especially in the SPX option complex, are still negotiated face-to-face between broker and market maker in a physical pit.
When trades are executed on the floor, it is easy to imagine a scenario where there is a modest delay between the parties agreeing to a price and the broker and market maker codifying their transactions on a handheld device or terminal. How much could the NBBO have moved since they came to an agreement?
Imagine if an extenuating circumstance forced one or both parties to enter their transaction details manually on a paper ticket!
- Trader fills out paper ticket
- Hands paper ticket to a runner
- Runner hustles to an Exchange desk
- Clerk enters the trade into the Exchange system
The market has probably moved and the agreed-to price might be outside the NBBO when it finally enters the Exchange system. Does this mean that the trade was extremely urgent or high conviction? Of course not – there was a physical delay in printing transaction details, that’s all.
What This Means For You
Unusual Whales is focused on providing accurate, meaningful insight. While transaction prices that print above or below the NBBO may turn out to be awesome trades, the fact that they occurred outside the bid-ask spread reflects normal market mechanics, not trading conviction.
References
- Securities and Exchange Commission Release No. 34-96782, File No. SR-ISE-2022-28, 'Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Proposed Rule Change to Amend ISO Functionality' (January 13, 2023). Available at: www.sec.gov/rules/sro/ise/2023/34-96782.pdf
- Cboe Global Markets, 'US Options Auction Process Specification,' Technical Documentation (January 17, 2024). Available at: cdn.cboe.com/resources/membership/US_Options_Auction_Process_Specification.pdf
- Securities and Exchange Commission Release No. 34-88455, File No. SR-MIAX-2020-04, Exhibit 5, 'Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change' (March 23, 2020). Available at: www.sec.gov/files/rules/sro/miax/2020/34-88455-ex5.pdf