What is a Bid-Offer Spread?

Spread refers to the contract price of the high price minus the contract price of the lower price when the position is opened. (So when the futures position is opened, the spread must be positive, and when the position is closed, the spread can be positive or negative.) Compared with the deterministic costs such as commission and stamp tax, the bid-ask spread is an uncertain transaction cost. The spread of the quote-driven market consists of the market maker's inventory cost, reverse selection cost, and order processing cost. The order-driven market's spread consists of reverse selection cost, order processing cost, and execution cost. There is no inventory cost.

Spread

Bid - Ask Spread : The difference between the Bid and Ask; it is used to measure market liquidity. Under normal circumstances, the smaller the spread, the higher the liquidity. For example: 1.3460-1.3450 = 10points (pts). Standard bank spreads are 5-10 points.

Because securities are traded on a competitive basis, the securities market is usually very active. But the market and spreads will still be affected by a number of factors:

1) Trading volume: Unless the stock market is sparsely traded, transactions within 100 to 1,000 lots usually do not affect the spread or price of the stock. However, a huge transaction of more than 1,000 lots can cause the buyer's bid and the seller's asking price to rise or fall, further affecting the spread.

2) Number of shares outstanding: Shares with a small number of outstanding shares generally have a large spread due to the small number of bids.

3) Securities market activity: Because the number of bidding shares decreases when the securities trading volume is low, the general spread is large. When the market fluctuates, the excessive trading volume will also widen the spread because the market makers and professional traders do not want to bear the risk of placing orders.

4) Market conditions: "Normal" market conditions usually narrow the spread because the supply and demand of the stocks reach a balance; but when the market rises or falls rapidly, the spread widens.

The difference between the bidding price and the bid price at the beginning of the transaction is unusually large.

The application of spreads in the silver market and its cases

Dynamic spread regression strategy scheme

Using the Bollinger Bands strategy for silver spreads at home and abroad can achieve better results. In the above strategy, we simply use Bollinger Bands as a trading strategy and fixedly use three times the leverage to open and close positions for trading, although the test results are good. , But there is still room for improvement.
On the one hand, because arbitrage trading is a low-risk strategy, the utilization rate of triple leverage funds is not sufficient. On the other hand, although the regression characteristics of the average silver price difference at home and abroad are stable, there will still be occasional spread spreads. Increase position control.
From the perspective of the volatility of the spread, the average value of silver spreads at home and abroad is not stable, and the use of fixed points as the standard for position control is not suitable (this is why we use the Bollinger Bands strategy), so consider the dynamic spread regression strategy:
(1) The signal to open and close positions is the same as the Bollinger Bands strategy above-that is, to break through the 2 standard deviation and the upper and lower tracks to trade with 3 times leverage;
(2) On this basis, take 3 times the standard deviation of the Bollinger Band as the signal for adding positions-for example, when doing a long spread, the spread further breaks through the Bollinger's lower rail of 3 times the preparation difference, and then add positions.
(3) Use a maximum of 5 times leverage.
Yield analysis <br /> Similarly, considering the transaction fees of the two exchanges, the deferral fee of the Shanghai Gold Exchange, and exchange rate factors, assuming an initial capital of 10 million, test the historical data from April 2011 to March 2012:

Basic Principles of Silver Arbitrage Trading

Among all arbitrage varieties, silver is a very good underlying asset. Compared with other agricultural products and industrial products, silver arbitrage has the following characteristics: (1) Global recognition, since the records of civilization, whether it is jewelry consumption or as Both the currency used for trading and silver play an important role.
(2) Uniform global pricing. Silver's pricing is the same whether it is in developed countries, developing countries, or autocratic countries in democracies. It is the uniqueness of pricing that determines that silver spread arbitrage must return. Agricultural products, industrial products, and other products, due to various reasons such as trade protection, the prices of different exchanges are often very different.
(3) Stable attributes. Compared with other underlying assets, silver has relatively stable chemical properties. Silver will never deteriorate regardless of its storage for hundreds of years. As long as the purity is specified, the underlying assets of different exchanges can be regarded as the same.
(4) Differences in investor structure. Why are there obvious price differences for the same product? It is precisely because of the existence of different investor groups that they have different expectations for the future of commodity prices. Investors in the Shanghai Gold Exchange are mainly individual retail investors, while Comex silver investors are mainly mature investors. The different structure of investors determines that the same commodity has obvious differences in different markets.
(5) It has the characteristics of a class of financial futures. In futures arbitrage, if commodity futures are involved, the spread will not necessarily return. Investors who want to realize arbitrage will necessarily involve spot delivery, and the commodity delivery process is relatively complicated. As a professional investor, I do not want to involve the issue of spot delivery. For financial futures, for example, stock index futures are settled in cash, there is no problem of spot delivery. Even if future government bond futures are settled on the spot market, the current liquidity preservation of the government bond market is very good, which can only be approximated by Cash delivery. For silver, although it is also delivered on the spot, because silver is the second hardest currency in the world, its liquidity is very good, similar to financial futures, making silver arbitrage opportunities very large.
(6) Silver is the perfect type of arbitrage. Silver has both a complete mean return similar to financial futures and a higher yield on commodity futures, but the risk is the same as a stock index futures arbitrage, which is a low-risk investment strategy.