Spreads widened beyond reasonable

[RiskyBoy]

Why have the spreads on ftse put options widened from 4 to 12?

[RiskyBoy]

So today FTSE Dec option spreads go from 12 to 4 and back to 12.

Could someone at IG please explain the rationale for these extreme changes?

Unrealised P&L and available funds are swinging like crazy. This is far satisfactory.

[RiskyBoy]

Ok, so there is an automated switch at 1630 which adjusts the spread for FTSE Dec options from 4 to 12, and from 6 to 16 for March options.

 

Could someone at IG explain why please?

[JamesIG]

Hopefully I can shed some light on this for you. 

 

During the cash market of the FTSE we are able to offer options with tight spreads. This is because there is an underlying market to hedge in, and an efficient representation of the current market. When the cash market shuts, i.e. after 16.30pm, we are providing the market, and subsequently the pricing for these options. Due to a lack of an underlying market to hedge in, as well as reduced liquidity in the Futures, then spreads will increase in the same way as they do on other traded instruments.

 

In response to the GBPUSD Flash Crash early Friday morning, we did briefly increase our spreads higher than normal. These have now been brought back in line with normal spreads, so you shouldn't see the 16 points on the March options, and there shouldn't be anything higher than 8. This has been brought in line recently. 

 

I hope this clarifies things. 

James

[RiskyBoy]

Thanks for the reply James.

I am not sure I fully buy in the explanation. Spreads on DAX options do not seem to widen after market close and remain at 6 for both December and March options. 
As I check now at midnight, spreads for FTSE Dec and March options are 6 and 10 respectively (after market).
This seems way excessive to me and it is odd that it is applied accross the price deck. Even when deep out of the money.

 

It is very concerning that spreads were widened to 12 without previous warning and that this is applied in a blanket way, even at deep out of the money strikes. It looks like the spread is arbitrarily widened at the minimum sign of some market volatility, even if this is in a "different" market like GBP FX crosses.

 

It would be useful to push some pop up message in the mobile app as a pre-warning when this kind of thing is going to be done so as to warn users their unrealised  P&L (and therefore available funds) is going to get a hit.

 

 

 

 

 

[JamesIG]

Hi, thanks for the reply. Let me try and clarify things, and give you more insight into the variable spreads which are applied to our options pricing.

 

Options pricing will be variable basis the time of day, as well as the current premium applied. The desk view 'in hours' to be between 08.04am and 16.30pm London time, with the spreads changing at these times for 99% of the time.

 

Dec DAX options for example will have an 'in hours' spread of between 5-6 points, where the spread will be 5 for premiums of 50 or less, and 6 for premiums of 60 plus. Anything between this will be variable on a sliding scale. Out of hours this will change to between 6 and 8 points, where it's 6 for premiums of less than 60, and 8 for premiums more than 80, with a sliding scale between. Therefore the spread is variable basis of how close to the money the strike is.

 

I appreciate what you are saying about the increase in spreads over periods of high volatility, and I will pass this on to the heads of each desk respectively. Like you said, it is worth noting that these spreads are variable, however it isn't an arbitrary decision. For example, on Friday we saw a massive devaluation of Sterling by 6% in the space of seconds, which cased this increase in spreads. This means that we were unable to inform clients of this change. If we were ever to change spreads on a known date and time then we would of course do our best to proactively reach out to inform clients. 

 

I hope this clarifies things for you.

James

 

 

[RiskyBoy]

OK thanks for the explanations.

[TerryW]

It looks as if what was happening last year on options is now happening on fx.  I got onto GBP/USD today ready for the BOE rate announcement. When the market started moving the spread began zipping up and down between 0.9 and 10 rapidly, so that it would have been purely a matter of chance which spread I ended up on.  There was only ever likely to be a modest movement - it was about 30 pts max - and no way I was risking what the spread was or taking a chance of a 10 pt spread.  I checked with IG and apparently this is now what they are doing - they say it may happen again tomorrow on non-farm.  Ridiculous!!  Taking a risk on the market is one thing, taking a risk of anything from 1 to 10 on the spread as well is crazy.  If IG are going to keep this up I will be looking for another broker.  Anyone else come across this?

[xs]

Totally agree - and it sucks. I just recently had 2 positions closed out prematurely because a sudden increase in spread hit my stop losses.The problem is that I think other companies do the same thing at times of expected extreme volatility.Don't know whether its there software that does it automatically - or whether some crazy uncaring SOB just presses a button.

[TerryW]

Hi xs

 

They did do the same thing yesterday on non-farm.  Support told me 'Our spread is never more than 10'.  10??  Are they serious?? Apparently they are.  For me that makes IG unusable for news trading, and possibly for all trading.  There are other brokers out there with variable spreads, but there are also UK-based FCA registered brokers with permanently fixed spreads, so I'll be opening an account with one of them to use for news trading, and then I'll see how it goes with other trading.  I've always been happy with IG in the past, but it looks now as if I will be moving elsewhere.

 

All the best   Terry

[JamesIG]

Hi  and  

 

I just wanted to quickly reply to your comments regarding the variability in spreads on FX, specifically during periods of increased volatility. This relates to how FX is priced and dealt in the underlying market, and how this spread is variable basis the wider global financial system. There is also a very interesting video which I have included below. I would recommend watching it all, however the FX section specifically starts at about 2 minutes. 

FX isn't priced by a central exchange like shares, but is instead quoted by bank and other institutions. This means the FX quote comes from a number of multinational banks who will give a price which they are happy to buy and sell currencies for. We take 10 - 15 of these largest banks and liquidity providers and then use an algorithm to display the best bid/offer in the market at that time. This gives IG's clients the tightest possible spread at that time and accurately reflects the underlying market. 

 

During periods of high volatility these banks will either increase their spreads, or pull their quotes briefly. In turn, the FX market bid/offer spread widens, and the IG spread reacts accordingly. During the regular trading day, like you stated, these max spreads will be capped, however we do sometimes increase these during known periods of volatility (Brexit / Elections etc). Once again this accurately reflects the underlying market. 

 

https://www.ig.com/uk/about-ig-videos?bctid=4542917668001&bclid=3671160857001 

I hope this clears up a few points and clarifies the FX variable spread. 

 

[Kaliroth]

Anyone trading options is probably best off using an options broker as IGs spreads are often unfeasible for out of the money and cheap options.

I do hate the way IG close out trades due to pure spread changes, like when markets close for a short period between exchanges. Like why are we getting closed out by a sudden increase in the spread when the market isn't even going to be open. Why can't IG simply leave the trade and the spread as it was until we see what the market reopens at? We have to be able to cover our loses regardless and if the market is closing then rather than claiming stupid spreads due to 'those are the bids/offers available' just skip that last moment when the exchanges close and give us the more realistic prices at open.