Pricing Models - Skew
Skewed price makes it possible to:
Make the spread, that would normally be passed through, profitable
Make prices more appealing to remove risk quicker
There are two main sources of skew:
A bank’s inventory
This is defined per pricing model. This gives a bank the ability to have greater or lesser amounts of skew for different categories of clients, should this be required. The skew is simply parameterised. For example Compass can be programmed for: 'when the risk is X, apply the maximum skew where the maximum skew is Y% of the base spread.’
Pricing models that enhance the price formation with information that is not in the book
This is specified per predictor, these are then combined to create optimal signal ratios.
A third skew parameter, again available per model, limits how much total skew will be applied.
Skew by Net Open Position (NOP)
This is skew to encourage limiting LP margin exposure.
This retrieves the mapping between the proportion of NOP limit consumed and the resulting additional skew (as a proportion of base spread) to be added to prices.
The value equal to or otherwise below the current NOP limit proportion is selected i.e. 0.0 would add no additional skew, 0.5 would skew the bid/offer to mid.
Configured at pricing.netOpenPositionToSkewMapping and pricing.skew.netOpenPosition
Skew by Signals
Provides signal based widening, skew or asymmetric adjustment to pricing. Signals can alternatively be applied on a per channel basis in distribution via the SignalsProfile
Configuration at pricing.skew.hfp or pricing.adjustedSignalParameters