How do spread companies calculate their spreads?

[Scripophilist]

How do spread companies calculate thier spreads?

I have been watching the price action on stocks, indexes and correlating it to the spread betting market.

On individual stocks it's easy to work out as they put the spread so wide that they can't fail to make money.

But on the indexes the spread moves around a lot, no doubt influenced by the futures. But there is a fair amount of correlation between spread betting companies reducing the opportunity for arbitrage.

They question I have is, what are the exact mechanics these guys use to construct a spread bet. Surely just not client demand moves the spread like a normal bookmaker, there must be some underlying rationale.

Would be interested in members thoughts.

 

[adrianallen99]

I think they have a big hat with numbers in it and every few minutes an employee is asked to pick one, each employee has a bingo type sheet of numbers. When they complete their board they win 10% of the cash they made from all the people stopped out by the change in spread/price.

I think thats how they do it anyway, but I could be wrong or just making this up.

 

[Scripophilist]

ROFLMAO

 

[FetteredChinos]

and therein lies the secret to riches lol

i have in the past,thought about trying to work out their algorithm for calculating the price in relation to the futures, just to see where and when and how much their bias is likely to kick in at certain points (eg usual support/resistance level)

but frankly, that is one helluvah task to to, and there must be easier ways of trading!!

again, a good intellectual exercise, but im not sure anyone will live long enough to work it out, unless someone knows the coders for their systems lol!

 

[Trader333]

Scrip,

I would have thought that the SB companies will move their quote to give them least risk exposure based on the total number of Long and Short positions in the index clients have with them. Sometimes they move it so far away you just cannot understand why but I would guess that this is done temporarily so they can redress their risk exposure before bringing it back.

Or it could just be a guess.


Paul

 

[gmca686]

I trade with D4F. The "spread" is the difference between the bid and the ask, and is fixed for indices. It does not change!
The actual SB cash prices vary in step with the Futures and are almost always at a constant bias to the futures. For example, the D4F S+P cash price is the e mini ESH4 price +1.25. The D4F DOW cash price is the Dow e mini YMH4 price plus 20(ish). I constantly monitor the two. The bias narrows as we move to expiration.
A D4F price move away from this bias presents a trading opportunity.
regards

 

[smallfry]

As you rightly have deduced, the formulae used are very complicated.

In the case of one particular SB firm, they have a rules based system which determines the pricing model used at any particular moment. This can be switched automatically on a timed basis, or manually if the action hots up.

Furthermore, markets can be linked together so that out of hours pricing on the FTSE for example is derived from the Dow or S&P. As someone else rightly mentioned, internal positions can be brought into the equation so that if the firms net position starts to drift against them, the price can be skewed to attract more buyers (or sellers).

It is virtually pointless attempting to reverse engineer the pricing system, for the reasons mentioned above.

Regards
Simon

 

[CityTrader]

Whilst the price is obviously based upon the underlying index, they also, like any market maker reflect their book position, and their anticipation of what the clients are likely to be doing. And let's face it most people are like sheep. They buy when the market has been going up, and sell when it's been going down. Very few buy the dips or sell the rallies. Thus after the market has been rallying, the premium you would pay to "buy" over the underlying instrument is normally higher than in a falling market.

 

[ISX Markets]

ISX Markets are a broker who are content on removing the barriers faced by private clients.

This is how the index price is calculated;

It is quite simply the futures Price +/- the fair value. This is why you will see a constant diff between the futures and spread bet price. On mkt opening and when futures are not traded, the price is deducted in line with the index and demand. A dealer will manually adjust the price during these periods to allows the firm to either be bid or ask.

We provide various services and are not market makers but act as broker to our clients. We ensure that all clients are quoted correct prices by the market maker we use.

 

[rossored]

"+/- the fair value"

What exactly is, and how exactly do you arrive at the "fair value"?

(This is not meant to be an aggressive question, although I appreciate that it may come across as such - i just can't be bothered to re-word it and remove any political-correctness-please-dont-offend-me-rubbish)

 

[ISX Markets]

fair value, is that difference between the futures value and the spot index value such that the futures and the equity markets are in equilibrium.

It is very difficult to calculate.

All companies source this data from Bloomberg or a similar source. It is difficult for individual investors to obtail this info as Bloomberg is very expensive.

I will try and add a page to our site giving this info, but I will need to speak to Bloomberg first, to see if we will have to pay for making such info public.

 

[smallfry]

Well ISX, if your method of calculating prices is that simple, I can see why you have such awfully high charges. Clearly you don't have much of a handle on how to price markets, but then don't I recall you saying somewhere in another thread that ISX are not market makers?

Simon

 

[ISX Markets]

We are not market makers, and therefore do not hold position opposite to our clients. We use existing firms and negotiate competitive rates for our clients.

 

[smallfry]

I don't wholly understand this.

On your site you mention an affiliate scheme where you support the concept of introducing agents etc.

But all you're doing is selling capacity in the market place as many of the telco's do to the low cost telecom companies. Does this mean that you will always offer a market, even though you don't have enough volume from a number of clients to make it economic to trade? And why should I line your pockets when I can go straight to the markets in order to trade?

In a sense, you're making money from your commissions only, and then you've got to pass some of that on to your affiliates... Isn't this like pyramid marketing?

Again, your website doesn't explain all of this.

Simon

 

[juanbyte]

rossored

Capital Spreads use the futures price +/- fair value as calculated by Bloomberg.

I compared the prices for 5 hours one day and found the SB cash qoute varied only 2 points with the futures yet the SB cash varied 14 points to the spot price.

They have to fix the price to something and for out of hours trading fixing it to the futures price is best.

 

[Robertral]

I've been following this thraed with intertest.

This is just an idea so bear with me. Can we not calc the futures price by saying it's the forward price with TAX + IR etc considerations built in. The spread is then adjusted to reflect how certain the market make is of his prediction (expectation)...This is jsut an idea so comments are welcome

 

[bonsai]

no

 

[Robertral]

no

no what?

 

[bonsai]

just no

 

[Robertral]

just no

Very concise and helpful