How Does a “Wholesaler” Make a Profit When They Provide Price Improvement on Options Trades?

A wholesaler makes a profit by capitalizing on the difference between the price at which they execute the retail order (which is inside the public spread) and the true fair value of the option, which they estimate. They also profit by quickly and efficiently hedging their resulting position and from the sheer volume of orders they process.

By providing a small price improvement, they secure the order flow and the profit from the full spread that would have otherwise gone to an exchange market maker.