What comes first, the chicken or the egg. Great debates within the scientific community have raged over this seemingly trivial issue.

But as trivial as this may seem, it is a debate that has raged for years in the Canadian option market. Market makers telling us to bring trades to the floor and they will provide the liquidity. Investors – both institutional and individual – telling market makers to provide the liquidity through reasonable bid asked spreads, and volume will follow.

This has once again been brought to the forefront with the listing of options on the Horizon Betapro Bull and Betapro Bear S&P/TSX 60 ETFs.

I was ready to trade on Monday… 100 contracts at a time. But when I see bid asked spreads that cannot be justified within any rational pricing model – bids on some of the March HXU calls were less than their intrinsic value - one has to pass.

Market makers defend their position by telling us that it is sometimes difficult to post bid and asked prices if the underlying security is not liquid. Fair enough! Using the underlying security to offset risk is of paramount importance to. But, in these securities… c’mon, it is not an issue.

HXU has an average trading volume in excess of 900,000 shares. HXD has been averaging 2.12 million shares daily with very tight bid / asked spreads (sometimes within pennies a share). Trading volume for HXU and HXD represents 25% to 50% respectively, of the average daily share volume on XIU iShares S&P/TSX 60 Index Fund), which has a very deep options market. I have had no difficuly trading 50,000 shares at a time, with minimal impact on price.

The chicken and egg theory is espoused, by market makers who argue that by entering an order the market sets a bid or asked price. But before an investor can do that, there has to be transparency. There has to be some comfort that when a position is entered, there is a reasonable outlet should one wish to exit before expiration.

That is not possible, when I see on my screen at-the-money calls bid 25 cents offered at $5.00. Prices which were confirmed by the NBCN trade desk which presumably, accesses live data from the MX.

When there is such a wide gap between bid and asked indications, 90% of option strategies cannot be implemented. Spread trades, for example, are out of the question.

Someone has to take the lead on this, and in my opionion, that should be the market makers. To this point, that leadership has been non-existent, and inexusable.

Here you have an opportunity to trade a volatile index based product. It can and should be a very successful offering. But like any business, you have to set reasonable standards for reasonable investors to play the game.

MX market makers… it is time to start your engines.

PS. If readers of this blog have experienced similar situations, this is the place to voice your concern!