Electronic index futures: spread quotes that follow the tape

A two-sided quote and residual inventory

A market-making stance on an electronic futures book is defined as resting a bid and an offer together. Completed two-sided fills earn the quoted spread. A fill on only one side leaves residual-inventory, long or short, and the book is no longer flat.

The intended result of that two-sided-quote is spread-capture: a buy on the bid and a sell on the offer counted in the quoted increment, not as a directional forecast.

The worked index-futures example uses a minimum half-point increment with a stated cash value of £5 per increment. Each completed buy-at-bid and sell-at-offer cycle is counted in that tick.

Trend-walk with the inside market

When the tape is drifting higher, resting offers are described as filling faster than bids. An unmoved two-sided-quote then becomes progressively short. The prescribed adjustment is to remain on the bid in the advance and immediately re-offer any long fill.

That adjustment is a trend-walk. The resting limit is walked with the inside-market so inventory is taken with the drift and is immediately offered or bid on the opposite side.

Intraday and one-minute charts of the September 2005 FTSE 100 index future on 11 August 2005 are presented as showing both extended trending intervals and sudden reversals. A sudden reversal can fill a resting bid into a falling market. That execution is an adverse-fill: a limit fill caused by the tape reversing through the resting order rather than by a random contra party.

Adverse fills and a flat book

After an adverse-fill, the described floor-derived choice is to flatten at once or to reverse and work the opposite limit. The objective remains a flat book rather than a held directional position.

The combined electronic procedure

The combined electronic procedure is: judge whether the session looks calm enough to treat as a trend, join the inside bid or offer with that drift, walk the resting limit if the inside-market moves, flip a fill onto the opposite limit, then decide whether to reverse or stand aside.

Following the prevailing move is described as producing many small completed-spread outcomes and occasional large inventory losses. Breakout entries invert that pattern into many small losses and occasional large gains.

Wider personal spreads and screen-side costs

When volatility widens the market's own spread, two-sided completion becomes harder. The archive text advises either quoting a wider personal-spread outside the current bid and offer, or waiting until the tape calms.

Screen-side competition is framed as requiring first-rank data and software plus the lowest attainable all-in costs, because other participants are already willing to stand in the book for a single small increment.