Spread trading newbie has questions.

[bone]

Congratulations on your success !

The Exchange uses an algorithm-based order matching engine to internally combine separate firm individual instrument component orders.

The Comms and Fees are not a problem for myself and my clients in that we are holding the spread position as a swing or position trade - we are trading for chunks of trading range and not a couple tics.

After lot of searching found a spread which I am comfortable to trade
have now been spread trading for 3 months (Asian futures spread) and had good success
Here are observations and questions
Q: Chicken or Egg
in a fifo type exchange traded spread with it's own book when you get filled you get two legs filled shown in your account.

- but how does the exchange make it happens?
- Does the volume of the spread affect volume of the 2 legs own book?
OR
- being completely separate books they have nothing to do with each other ? if so then do the 2 legs positions get merged with the individual legs book?

- In global scheme of things This spread's volume is low but it seems more predictable IF I can increase volume will it affect the characteristic

Observations

- Native spread bid/ask spread ( of the spread) is much better than 2 legs
- Volume of spread is lower that of the legs
- large % goes in Comms and Fees ( even after rebate from exchange fees taken in to consideration!)

 

[traderjo]

Hi Bone thanks
reg " internally combine separate firm individual instrument component orders." how though? are you saying the exchange fills the spread order by taking individual legs own books?
If so then the same spread bid/ask is not visible if I have the two legs best BID/ASK showing side by side
sometimes the spread's own BID/ASK is only 1 tick ( in this case 10 ticks to a point)
but the BID/ASk diff in individual legs is much more
Confusing ( not that I am complaining as I see good depth of market on the exchange spread.. just wanted to understand it better)
If I understand it better then I was thinking of legging out of a filled spread! may be I know then I am drifting away from main strategy

 

[traderjo]

Example
If Selling 1 AUG-SEP spread = you can get filled at -0.2 as Native spread
However at same point if you look at the AUG and Sept legs best bid and ask
Sell AUG will be 162.2
Buy Sept will be 162.6
Thus : Selling AUG-SEPT spread @-0.4 NOT -0.2
So if the exchange somehow fills my spread at -0.2 from native book how does it convert that in to legs? who takes up the legs ? as all leg bid and and ask are NOT willing to give me a synthetic spread at same value as the Native spread!

as a spread trader you don't care ( I am assuming) what the individual legs got filled at as long as you get a good Spread fill
However this is a mystery

 

[bone]

I use TT and I enable implied pricing for the individual leg instruments.

You will almost always get a tighter bid/ask spread with much more volume liquidity in the spread as compared to the outrights. It's true for CME Eurodollars and it's true for ICE Brent Crude. Most of the volume in the spreads is Commercial and most of the volume in the prompt outright months is spec.

The Commercials are serious and they don't play games with the order book. Personally - I would much rather trade with Commercials.

Hi Bone thanks
reg " internally combine separate firm individual instrument component orders." how though? are you saying the exchange fills the spread order by taking individual legs own books?
If so then the same spread bid/ask is not visible if I have the two legs best BID/ASK showing side by side
sometimes the spread's own BID/ASK is only 1 tick ( in this case 10 ticks to a point)
but the BID/ASk diff in individual legs is much more
Confusing ( not that I am complaining as I see good depth of market on the exchange spread.. just wanted to understand it better)
If I understand it better then I was thinking of legging out of a filled spread! may be I know then I am drifting away from main strategy

 

[traderjo]

I use TT and I enable implied pricing for the individual leg instruments.

You will almost always get a tighter bid/ask spread with much more volume liquidity in the spread as compared to the outrights. It's true for CME Eurodollars and it's true for ICE Brent Crude. Most of the volume in the spreads is Commercial and most of the volume in the prompt outright months is spec.

The Commercials are serious and they don't play games with the order book. Personally - I would much rather trade with Commercials.

I use TT and I enable implied pricing for the individual leg instruments.
You mean the Doms of actual individual legs or some theoretical legs pricing which make up the Native exchange traded spread?
I am still unclear on where the individual leg fills come from when one gets the spread filled ?
If they come from native legs how come native legs DOM don;t add up to give same synthetic Spread as native spread?


I use CGQ desktop and that screen shot I had posted had the native legs and native spread sid e by side not some derived legs

 

[traderjo]

Update :
All spreads of this commodity are such that front month being cheaper than further month for most f the time historically
and I was in Soled AUG/SEP position ( short AUG+ Long Sept), in this case Aug contract expires at end of July
Few days ago due to shortage of supply AUG being current month rushed ahead of Sept and position become a loss and I closed out SOled @-0.4 and bought back @ +0.5

But then again it did go down,,,,
Should I have closed it ?

So lesson learned?
- don't trade a spread so close where front month is close to expiry but then again when I opened the position it was behaving