Calculating Synthetic Spread Prices, Volumes, and Positions
Summary
This document explains how to represent a multi-leg spread using separate price and trading multipliers. It derives synthetic bid and ask prices from each leg’s best quotes, reversing which side of a leg’s market contributes when its price multiplier is negative. Spread quote volume is estimated from the available size on every leg, adjusted by trading multipliers, with the smallest leg capacity limiting the result. It also converts leg positions into a rounded spread-level net position and provides conversions between spread and leg order quantities.
The approach requires valid bid and ask sizes for every leg before it reports a spread quote, and it packages the calculated values into a synthetic tick. This is a calculation framework, not a complete spread strategy: it gives no signals, transaction cost model, execution coordination, or performance evidence. The notes do not assess risks from stale or asynchronous leg quotes, rounding effects, or discrepancies between price and trading multipliers.
Key ideas
- Spread prices are weighted combinations of leg prices, with negative weights using the opposite quote side.
- Spread bid and ask sizes are constrained by the leg with the least adjusted available volume.
- Leg positions are scaled by trading multipliers and rounded when aggregated into a spread position.
- Spread order size can be translated into the corresponding quantity for each leg.
- A synthetic quote is withheld until every leg has usable bid and ask volume.
Tags
From a private course collection; the original is not published.