A designated trader sets each day’s volatility skew by hand

Evidence

On the morning of every trading day on the Chicago Board Options Exchange, “Designated Primary Market Makers” set the skew for the options for which they are responsible. As the underlying stock price or index value changes, Autoquote uses this skew and the Cox-Ross-Rubinstein model to generate prices. If trading conditions shift markedly, the primary market maker can reset the skew during the day, but this by no means always happens. — Donald MacKenzie, An Engine, Not a Camera, 907

Categorization

• QUESTION: The manual resetting of skew ‘by no means always’ happening during marked shifts is intriguing — why would market makers fail to update? Worth chasing the microstructure literature.
• SHARE: For a finance PhD friend: the daily ritual where one designated market maker literally hand-writes the skew that Autoquote then prices from — a striking case of human judgment embedded in algorithmic execution.
• XREF: connects to: Index option prices embed a skew that actual price movements do not justify — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 911; Spreading’s robustness to volatility estimates made it viable for floor traders — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 734

Broader Connections

• Index option prices embed a skew that actual price movements do not justify #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 911
• Spreading’s robustness to volatility estimates made it viable for floor traders #responds-to (0.75) — Donald MacKenzie, An Engine, Not a Camera, 734