Reference price

A spread order trades a price difference, not a price. But the two underlying legs still each need an actual traded price once the spread order is matched. The exchange gets there by anchoring one leg to something concrete and building the other leg off it.

That anchor is the reference price. The workbook's own definition: "Reference price = Last Traded Price of the first leg contract."

When a spread order in, say, an OCT21NOV21 bond futures spread contract is matched, the exchange fixes both legs' traded prices in one step:

• Traded price for the first leg contract = Reference price
• Traded price for the second leg contract = Reference price + the price difference entered for the spread order

Because the reference price is simply the first (near-month) leg's own last traded price, the near-month leg always trades exactly at its own prevailing market price — it is the far-month (second) leg's price that is derived, by adding whatever difference the matched spread order specified.

The workbook uses the same word, "reference price", once more elsewhere in the trading mechanism chapter: pre-trade trade execution range checks match incoming orders only if the trade price falls within a range built around the reference price of the contract — there, the reference price behaves like the day's base price. The spread-trade meaning above is the one built specifically for the spread order book, and is the one this page focuses on, since the workbook gives it its own explicit formula.

The 6.10% GOI 2031 OCT21NOV21 spread contract shows a resting sell order of 10 lots at a spread price of Rs 0.10. A trader's buy spread order for 10 lots matches it.

At the moment of the match, the October (near-month, first leg) contract's own last traded price — the reference price — happens to be Rs 98.55.

First leg (October) traded price  = Reference price              = Rs 98.55
Second leg (November) traded price = Reference price + 0.10       = Rs 98.65

Both legs are booked at once: October at Rs 98.55, November at Rs 98.65 — a spread of exactly the Rs 0.10 the order specified. Had the October contract's last traded price instead been Rs 98.70 at the moment of the match, both legs would shift together — October at Rs 98.70, November at Rs 98.80 — the spread itself unchanged, because the reference price only sets where the pair sits, not the width between them.

Chapter 6 (Trading Mechanism in Exchange Traded IRD), section 6.2.5 (Spread Order Book), states the reference-price formula immediately after showing the OCT21NOV21 spread order book example. Expect a question that gives a near-month last traded price and a spread difference and asks for the resulting far-month traded price.

• The reference price is the first leg's last traded price — the near month, not the far month.
• The far (second) leg's price is reference price plus the entered difference, which can make the far leg's traded price lower than the reference price if the entered difference is negative.
• The reference price moves with the market; it is read fresh at the moment the spread order matches, not fixed at the start of the day.
• Do not confuse this with the base price, which the workbook also loosely calls a reference price for ordinary (non-spread) trade-execution range checks — that is a different, day-level concept.