How is spread order placed?

[insight2]

Hi,

I only ever traded outright positions, so can somebody explain to me how an electronic spread order is executed?

When one places spread order, are both sides executed simultaneously? For example, if on one side, price you wanted is available, but on the other side it is not, do you get partial fill with one 'leg' hanging in the air?

What I mean, if one is trading through some electronic platform, like IB, is there guarantee that both sides will be filled at your desired prices.

regards,dejan

 

[Directional]

depends on how you execute the spread and what market it is in.

inter-market spreads, such as correlation spreads like bund vs bobl, you just have to work the legs individually - meaning, you could quote the inside bid or ask and wait for a fill, or else you could just hit the market at whatever is available.

if you're talking calendar spreads, then most markets have exchange quoted calendar spread markets which are seperate but fungible markets based on the differential between the two contracts - so if you place a trade on the spread market itself, then you are basically either long or short the differential of the spread - the same as if you bought one leg and sold the other, except you did it in the market quoted on the spread itself.

Its totally possible to work a price in the outrights to get into the spread, and then exit in the spread market itself or vice versa.

 

[arabianights]

There are also tools called autospreaders that will try and get you into the spread at your quoted price from the outrights (or even bizzarre strategies involving butterflies, condors and the like, if you enjoy comission costs) - they can make inter-market spreads for you as well.

The difference is that the various legs are not guaranteed and slippage is certainly a possibility. As far as I am aware all exchanges will guarantee the various legs of a spread. This could also lead us into a discussion of implied pricing if you're interested, which it helps to know about particularly with more complicated strategies.

 

[Directional]

yep, good post. Implieds in calendars is where it gets quite interesting.. implied-in, implied-out and implied-on-implieds

 

[arabianights]

I think I'm correct in saying that LIFFE connect only supports implied-out pricing (and that on straightforward calendar spreads). Implied-in pricing on strategies is supported in the sense that a bid or offer that would be implied by implied-in pricing is taken, but it's up to the clients to calculate these and actually show them in the market display. Just a bit of trivia...

 

[Directional]

yes, i think you're right. CME only supports implied-out at the front end of the curve on Eurodollars, and they can switch it off if it gets fast too.

 

[insight2]

... This could also lead us into a discussion of implied pricing if you're interested, which it helps to know about particularly with more complicated strategies.

Please, fire away, I certainly like learning something new.

cheers, dejan

 

[arabianights]

Arbitrageur will know more about this than me, but here's a quick introduction:

As you know, a calendar spread is going long one month versus short another month.

So if March 08 of some contract is quoted bid 93.105 and offered 93.110, and December 08 is quoted 93.470-93.475, then one can immediately go long the March-December spread by going long March at 93.110 and shorting December at 93.470. Alternatively one can short the spread by going short March at 105 and long December at 475.

The exhances recognise this, and take the prices in the outrights to generate implied-out prices from the outrights into the spread quotes. In the above example, there is an implied-out offer for the spread at -0.360 and a bid for the spread at -0.370. In real markets, these bids and offers will be joined by other market participants, and there would usually be a bid or offer at -0.365 in the spread, making it more liquid than the outrights would imply. The main point is that the exchange guarantees that all or no parts of the transaction are executed; if one takes a position in a spread with an implied-out offer then the outrights will trade simulataneously.

The opposite happens with implied-in pricing. Suppose that there were no bids in the December contract, but there was an offer for the spread at -0.360. In this case, a price is implied-in from the spreads into December at 465. If this is hit, then three things will happen: Whoever takes the price will end up with a short position in december at 465, whoever is offering the spread at -0.360 will be at least partly filled, and whoever is bidding for March at 105 will also be filled the number of lots traded by the spread. Implied-in pricing only happens with calendar spreads on LIFFE; I believe that CME also supports implied-in pricing on butterflys.

Finally, there is implied-upon-implied pricing, where implied prices are created from other implied prices. As far as I know no exchanges implement this at all, but there are systems (the previously mentioned autospreaders) that will generate them, although as the different legs of the transaction are not guaranteed there is execution risk.

My experience trading STIRs is that most quoted prices are a combination of implied and, er, "real" prices.

 

[Directional]

that was an excellent explanation. I couldnt have done any better, even if i'd tried - great post!

 

[insight2]

I'll have to work on this. But, guys thank you for your time.

cheers, dejan

 

[fcmisc]

What's the best autospreader for trading exchange listed spread, against exchange listed spread?

At the moment I use Stellar, but I may be forced to change to Ecco or something else soon.

 

[RichieE]

What's the best autospreader for trading exchange listed spread, against exchange listed spread?

At the moment I use Stellar, but I may be forced to change to Ecco or something else soon.

If you're using Stellar does that mean that you're working for Schneiders?

 

[fcmisc]

Alas I'm not working for Schnieders. They didn't reply to my enquiry.

 

[insight2]

Is anybody trading spreads intraday?

 

[arabianights]

I experimented trading spreads intraday beginning the week that they annonced they were going to be stabilising LIBOR, and was short December/July and March/July Euribor calendar spreads when they announced it - not doing that again...

Certainly in the STIRs the calendar spreads don't move too much, they're very scalpable if patient but at the price of increased comission, doesn't suit my current style of trading tbh.

 

[fcmisc]

Is anybody trading spreads intraday?

My student punted a few hundred lots over nfp today. But I'm not sure whether or not he made any cash in the process.

 

[RichieE]

Is anybody trading spreads intraday?

Yep - I am... it strips out a lot of volatility in he market but you have to aim to take more than one or two ticks out of the market to overcome the double round trip fees...

 

[insight2]

Can somebody explain what "STIR" is?

regards, dejan

 

[arabianights]

Short Term Interest Rate futures (Eurodollar, Euribor, Short Sterling, Euroswiss and a few others, but those are the main ones). The above four are settled based upon 3-month (LI/EURI)BOR in the respective currencies at experiation. There are also exchange traded options on the above/

 

[RichieE]

Can somebody explain what "STIR" is?

regards, dejan

A STIR is a Short Term Interest Rate futures contract.

In general they are the deposit rates which the banks offer to each other for a 3 month period (i.e. the 'Interbank' Offer Rate). For Eurodollar deposits (USD deposits outside of the US) it is known as LIBOR (London Interbank Offered Rate), for Euro deposits it is the EURIBOR (European Interbank Offered Rate).

For example, if the EURIBOR futures contract for delivery in Mar 2007 is quoted as 95.50 and you believe that 3 month EURIBOR will raise to 95.75 you can buy the contract at 95.50 hoping to earn 0.25 (i.e. 25 basis points) nearer to the expiration.

To trade the spread you look at two different contracts. For example, the Mar 2007 and Jun 2007 contracts. If Mar 2007 contract is trading at 95.50 and the Jun 2007 contract is trading at 95.75 the 'spread' between them is -0.25 (i.e. 95.50 - 95.75]). If you expect that this spread to narrow (i.e. the Mar 2007 price to rise and the Jun 2007 price to fall) then you can 'buy the spread' by buying the Mar 2007 contract at 95.50 and selling the Jun 2007 contract at 95.75. So if, in a month's time, if you Mar 2007 contract is at 95.65 and Jun 2007 is at 95.60 the spread is now +0.05 (i.e. 95.65-95.65) you can sell your spread (i.e. sell Mar 2007 and buy Jun 2007) to gain a profit of 0.30 (i.e. [+0.05]-[-0.25]).

If you want to learn more, read "Trading STIR Futures - An Introduction to Short-Term Interest Rate Futures" by Stephen Aikin

(Note: The numbers above are just made up to illustrate... I don't expect to gain 30bps in a month from this trade!)

Hope the above helps.