How Market Makers Form Mid Rates for SOFR Swaps
Summary
The question asks how dealers estimate mid-market rates for SOFR interest-rate swaps when public order books are not visible. It considers deriving a rate from on-the-run Treasury bonds, using recent swap transactions, or quoting swaps as spreads to Treasury securities, and raises practical questions about data timing and tenors without a matching bond maturity.
The response gives a concise description: a market maker starts from the par swap rate implied by the swap curve, then adds bid-offer spreads, potentially adjusted for skew. A taker may treat the midpoint between bid and offer as the mid price. This does not explain how dealers construct or source the underlying swap curve, how transaction data informs it, or how quotes are interpolated across maturities. It therefore offers a basic pricing convention rather than a full account of real-time market-making practice.
Key ideas
- A swap curve provides the starting point for a market maker's par SOFR swap rate.
- Dealers add bid-offer spreads and may adjust quotes for skew.
- The midpoint between bid and offer can serve as a taker's reference mid price.
- The response does not detail curve construction, trade-data sources, or interpolation for less actively quoted tenors.
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# Mid price for IRS SOFR # Mid price for IRS SOFR I’m trying to understand how market-makers derive the mid price for IRS SOFR swaps, particularly since there are no visible order books for these instruments (as far as I know). From what I gather, market-makers typically start with a mid price from the market and adjust it based on their books, but how exactly is this mid price sourced? I have a few hypotheses: 1 - Using ON-the-run (OTR) Treasury Bonds: One approach could be to take the mid price from OTR bonds on platforms like BrokerTec, build a discount curve from these instruments, and calculate the swap rate from that. However, since OTR bonds are not discounted using SOFR, this may introduce inaccuracies in the swap rate for SOFR swaps. 2- Using Recent Transactions: Another possibility is using the last transaction on a similar swap to set the price. The issue here is that TRACE data might only be available the following day, making it challenging to get timely information. Is there another source for real-time or near-real-time last traded prices for SOFR swaps? 3- Quoting SOFR Swaps as a Spread to OTR: I recall someone mentioning that SOFR swaps can be quoted as a spread to OTR Treasuries, but I haven’t found much detail about this on google (is it ICAP that operate these?). Are there order books for these swap spreads, or are they just indicative quotes that aren’t directly tradable? Additionally, how would market-makers determine a mid price for a swap tenor like 15 years, where there’s no OTR bond with a matching maturity? Any insights or corrections on how this process works in practice would be much appreciated! ## Answer by sean Guo (score -3) https://quant.stackexchange.com/a/82015 Market-makers will get the Par swap rate based on the swap curve, then add spread for bid/offer with or without skewness. the taker has the mid as (bid+ask)/2.
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