Buy spread order

A calendar spread means selling one month's contract and buying another month's contract on the same bond. Placed as two separate orders, there is a real risk the price moves between the two fills — the workbook calls this execution risk.

Exchanges remove that risk with a dedicated spread order book, where the two legs trade together as one instrument. A buy spread order (BSP) is how a trader tells the system which side of that combined instrument they want.

The spread contract itself quotes the difference between the far-month and near-month contract, and that difference "can be positive, negative, or zero" — something no ordinary single-month contract allows. Orders in the spread book match on price-time priority, where price means this difference.

Once a spread order is matched, the exchange executes both legs simultaneously at fixed prices:

• First leg traded price = Reference price (the first leg's own last traded price)
• Second leg traded price = Reference price + the price difference entered for the spread order

The workbook's own definition of the two sides: "A buy side spread means sell near month leg (first leg) and buy in far month leg (second leg). A sell side spread means buy in near month leg (first leg) and sell in far month leg (second leg)."

So buy spread order of 10 lots in a given OCT-NOV spread contract means: sell 10 lots of the OCT contract and buy 10 lots of the NOV contract — both executed together, at the reference price and the reference price plus the entered difference.

A trader expects the spread between the September and October 6.10% GOI 2031 bond futures to widen. He places a buy spread order for the OCT-relative-to-SEP spread combination, effectively wanting to sell September and buy October, at a quoted difference of Rs 0.05 — matching against a resting sell-side spread order.

Both legs execute together: if September's last traded price (the reference price) is Rs 99.00, his September leg trades at Rs 99.00 (sold) and his October leg trades at Rs 99.00 + 0.05 = Rs 99.05 (bought) — exactly matching the workbook's own worked spread trade.

Ten days later, September has fallen to 98.80 and October to 98.95 — the spread has widened to Rs 0.15. He squares off both legs together. His gain: (0.15 − 0.05) × 2,000 units per lot = Rs 200 per contract. Because both legs traded together as a buy spread order at entry, he was never exposed to the market moving between the two fills — the very execution risk a two-order calendar spread would have carried.

Chapter 6 (Trading Mechanism in Exchange Traded IRD), section 6.2.5 (Spread Order Book), defines the buy spread order (BSP) and sell spread order (SSP), the reference-price mechanics and the OCT21NOV21 worked spread contract; section 5.6 (Chapter 5) supplies the calendar spread example the buy spread order is built to execute safely. Expect a question converting a stated "buy spread order of N lots" into its two underlying leg trades.

• A buy spread order sells the near month and buys the far month — read the name from the far leg's side, not the near leg's. This is the single most-tested confusion in the section.
• The spread price (the difference) can be negative or zero, unlike an ordinary contract's price.
• The second leg's traded price is the reference price plus the entered difference, not an independently quoted price.
• The reference price is the first (near-month) leg's own last traded price, not the spread contract's own last traded value.
• The whole point of the spread order book is that both legs fill together, removing the execution-risk gap that placing two ordinary orders would create.