← InstitutionalLesson 13 · 4:39
Execution: complex orders, auctions and RFQs
Summary
You can explain legging risk and why a complex order that fills both legs at one net price removes it. You can describe price improvement auctions and requests for quote in general terms, and measure every fill as slippage against the mid when you decided to trade.
Key terms
- legging
- Trading the legs of a spread one at a time, which leaves a direction bet open between fills.
- complex order
- One order for a whole spread at one net price that fills all legs together or not at all.
- natural price
- The spread's price built from its legs by paying each leg's ask and selling at each leg's bid.
- price improvement auction
- A short timed auction where other firms can answer an order with a better price than its limit.
- request for quote (RFQ)
- Sending a spread's details to market makers so they answer with a bid and an ask.
- slippage
- The gap between your fill and the mid price when you decided to trade.
- complex order book
- An exchange's book of spread orders, each quoted as one price for the whole spread.
Check yourself
Answer each question to see why the right answer is right.
1. An XYZ $100/$105 call spread is quoted $1.77 bid, $1.97 asked, $1.87 mid. You buy the $100 call at $3.50, then XYZ slips to $99 before you sell the $105 call, whose bid sinks to $1.25. What did the spread cost?
2. If XYZ had risen $1 instead while you were legging, the $105 bid would have been $1.85 and the spread would have cost $1.65. What does that tell you about legging?
3. What does a complex order do?
4. The real SPX December 7,500 call was $150 wide per contract and the 7,600 call $130 wide. Built from its legs, how wide was the spread's natural market?
5. For 20 spreads, the example complex fill at $1.90 cost $60 against the mid, the natural price $200, and legging into the falling stock $760. How does a desk use numbers like these?
Finished the video and the quiz? .