Some institutions are running exchange listed option market making automatically, like Citadel.There are lots complicated things for options market making in OTC market, like modeling the volatility surface, hedging Greeks, calculating risks for options portfolio, pnl attribution to Greeks, and etc. They are all so complicated that the market maker banks usually build a Quant team for this. Also it is why so many posts discussion here. Another thing is all above are computing resource consumed thus very hard to apply them in a ultra low latency way, like HFT automated market making with milliseconds.Now in automated option market making, are there already new algorithms to handle above things automatically? Or the exchange listed options trading is very different from OTC, so automatic is possible? I don't want to ask the "secret" models how they earn in this way, just the basic methodology in theory, like the models and related computing implementations we are discussing here.I'm a new joiner here so please inform me if I should not paste in this sub forum. Also have searched there is no related topics before.Thanks in advance.

OTC of course permits tweaking for specific customer requirements, this may be something as trivial as changing the dates for the cash flows, a little more complex like choosing the basket of instruments it references or something scary where tax law, complex modelling, faith based law like Sharia and compliance requirements are merged.This is of course also the highest margin quant work, so the banks quite naturally don't want to commoditise it by having a market.For an automated market to work easily you need fungibility, so a system can generate a price that applies to all N of the instruments in that segment.That's why the N>50 different bonds a large firm may have issued cannot be treated in one market segment, even if all their shares can.There is a whole pile of trading whose fundamental strategy is exploiting the price differences between nearly identical instruments and knowing when the "nearly" matters and when it does not.There is also the cost of building the market making system, you need a core and then the calculations and rules for each instrument. The marginal cost of implementing each is not vast, but it requires maintenance and if there isn't enough turnover then you don't get a positive return.As above, there would be a wide spread, so if you quoted X and Y, the customers would just ring in and ask for something between the quotes, so you'd end up paying for both an IT system and brokers/dealers.Also, these models are not exactly 100% reliable. They sometimes spit out prices and spreads that look reasonable enough to get through any sanity checks you might code, but the moment a grown up looks at them, they are obviously wrong. This can suck out as much money as you happen to have.That can be fixed, it is not impossible to make a model that you can let automate trading on it's own without supervision, but it is expensive and the more complex the product the higher the cost and the harder to be 100% sure that it won't do something bad.If the prices are "bad" you can be sure that there are people, some of whom are on Wilmott that will earn their bonus by biting you. I have been part of conversations where it was discussed how best to exploit such unfortunate pricing, do you grab a pile of cash now which will alert them to the problem, or do you trickle the money out until they fix it.

Thanks DominicConnor. In OTC market it mainly focuses on customerized requirements, the market maker usually need to price the exotics or illiquid products. So need to build the vol surface based on the liquid and reliable quotes in market, e.g. the ATM, RR25 and BF25 in FX market. So the main risk is modeling vol and pricing product.For the exchange listed options, they are almost vanilla options. (I checked some US equity options, they are all European vanilla). The market maker mainly focuses on providing the liquid and reliable quotes itself. So the risk exposed is different from OTC, like the inventory risk.The system performance could be better than OTC as the lower complexity, however should still poorer than cash equity HFT market making system, because there is pricing computation requirements.Some of my thoughts, any comments to the misunderstanding is appreciate.

I'd like to write some thoughts myself here. The key difference between exchange options and OTC options is liquidity. Exchange options is more liquid, many investors and other market makers trade on them, thus there is "market quotes". Similar to cash equity market making, market maker would focus on the risk control of "market quotes" price (iv) moving, and earn from the bid/ask spread. Of course a bit more complicated as more risk factors to options except for delta, like vega, gamma and theta.The OTC market is different, usually the market maker need to provide exotic options products, which are customized by client and not liquid. There is no "market quote" price, you need to synthesize it (using other liquid product), pricing it yourself, and sell to client with some premium. The risk is if price (valued by yourself) accurate or not. Also the requirement for such a product it not frequent. So it makes it difficult and unnecessary of automatic market making on such product.BTW, the OTC exotic products are similar to the art investment market, which is also not liquid and you need to judge the value (pricing) yourself. Much appreciate if any comments.

I would say that the main difference is credit risk. Exchange traded options are centrally cleared so the parties are indifferent to both the number of parties and the names of the parties. I can sell $100MM in options on a exchange to 25 different counterparties and it is still one transaction. In the OTC world, all trades are bilateral because of counter party credit risk.