Synthetic Spread: Building Edge from Two Mediocre Legs
A synthetic spread is only as good as its weakest leg. Latency, mismatched liquidity, or stale quotes can turn low-risk arbitrage into unwanted exposure.
Managing cross-venue spreads requires synchronized data, smart routing, and guardrails when correlation breaks.
Why it matters
Synthetic trades rely on tight coupling. Any drift between legs creates slippage or opens directional risk, especially during volatility.
Common mistakes
- Assuming liquidity is symmetric across venues.
- Ignoring latency differences when legging in.
- Failing to unwind when correlations break down.
Implementation steps
Sync market data
Ensure feeds are normalized and timestamped to avoid stale quotes.
Size by weakest leg
Base trade size on the venue with least depth to avoid partial fills.
Auto-unwind
Monitor leg divergence and unwind automatically when thresholds are breached.
LiquidityAI tie-in
- Cross-venue latency monitors keep legs in sync.
- Policy rules cap size based on thinner markets.
- Automated unwind triggers fire when spreads misbehave.
Case sketch (composite)
A crypto arbitrage bot lost 30bps when one exchange lagged. After integrating LiquidityAI, latency monitoring and auto-unwind rules cut similar incidents to near zero.
Takeaways
- Synthetic spreads demand constant synchronization.
- Always size trades by the thinnest leg.
- Automate unwind decisions to avoid lingering exposure.
LiquidityAI provides tools and education for systematic trading. This article is for informational purposes only and does not constitute investment advice. Trading involves risk, including possible loss of principal.