What is a spreader?

Posted: February 7, 2010 in Spreader design

A spreader is a piece of software designed to obtain multiple instruments at a defined differential (spread).  This software can work a number of instruments to create this, not just outright, options, or strategies.  Often, traders will utilize spreaders (often referred to as leggers) to beat the CME exchange matching engine in creating strategy instruments.  Yes, the CME matches the outrights internally to create strategies so you are constantly competing against them but that is a story for a different day.

Ok, lets do an example.  We want to create a March (H) 2010 – June (M) 2010 spread by legging the outrights.

Suppose the H10 market is 2404 99.695 99.700 1155 and the  M10 market is 11 99.585 99.590 99.

Wait what does all that mean? That is a top of the book quote, 2404 is quantity bidding for 99.695 and 1155 is the quantity offering 99.700.

So how do we create a spread?  If you are buying the spread then you are buying on the bid of H10 (96.695) and offering on the offer of M10 (99.59).  Still there?

Spread_Bid = bid_instrument1 – offer_instrument2;

Spread_Offer = offer_instrument1 – bid_instrument1;

This assumes a 1 to 1 price ratio.  We can get into weird cases with strategies later on.

So the spread price would be 0.105 by 0.115 or traders would say 10.5 by 11.5 (basis point mentality).

The quantity quoted now is the interesting part; it is the minimum intersection of each side.  Example: 99 10.5 11.5 11

So how do you trade these in the outrights?  I usually work the least liquid leg in the outrights which usually turns out to be the longest time to expiration when you see enough of these.

Now, what happens when you get hung? Wait, what is getting hung?  Oh, that is when you get one side of the trade but miss the other side for some reason (market moves away from you, etc.)  Options: Scalp, Scratch, Take loss, Work order.  Most market makers always work to scratch when hung.  Scratch meaning cancelling the trade out at the price it was received.  The word scalp in the STIR futures usually means a 1/2 tick ($12.50) .

More later…..Time for SuperBowl!

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Comments
  1. Endless says:

    nice explanation..do you have more info on spreaders? thanks

  2. Aaron says:

    Excellent explanation on what a spreader is. I was wondering if you are familiar with another variation of spreader using exchange traded spreads to create a synthetic spread to beat the CME matching engine.

    It works like this, assuming ZS F4/H4 spread is 18 bid, ZS H4/K4 is 17 bid, I could sell these 2 spreads at the current bid for 35 (18+17) and immediately buy a ZS F4/K4 at 33 offer for a 2 cent profit. I believe these strategies had been arb to death by the ibanks and HFs but I am working on an exotic market and find these opportunity still available and trying to find a way to game it. I’ve worked on a spreadsheet but the combinations are too numerous to follow visually, are there software out there that can do these leg work without having one to constantly monitor an entire list?

    Thanks for the helpful article and good trades.

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