Spread Analysis - Yield Profiles in Pricing Analysis

Yield profiles can also be useful in identifying inefficiencies in pricing.

In aggregate yield profiles show a high level view of underlying trends in the grouped data.

If when grouped by instrument, you are consistently seeing low or negative inception spreads this may be indicative of latency in pricing.

• Small inception spreads can indicate pricing in that instrument is too tight, it could also indicate a large portion of the underlying flow is negative, counterbalancing the positive spreads

• Negative inception spreads in aggregate are highly indicative of latency in pricing. Latency arbitrage traders can take advantage of slow rates and secure fills the wrong side of mid.

e.g. 2 GBPAUD trades filled on different rates, you may want to investigate whether the blue spread is too tight:

e.g. XAUUSD rate in aggregate offside at inception likely shows underlying pricing is latent:

Latency arbitrage may also be identifiable in instruments falling offside up to 500ms after inception in aggregate.

histograms

Yield Histograms are a useful visualisation for the standard deviation and skew of a distribution of returns for a set of trades.

Red bars to the left of 0 are representative of trades that are offside. When viewing a histogram for an instrument, if the chart is heavily populated left of zero at 0 and 500ms time horizons, it can be indicative of latency arbitrage and therefore likely to indicate the rate has latency.