The Spread Trade

You don't always need a price trending in one direction to make profit. As long as money is changing hands then the price does not need to trend. The spread trade takes advantage of a market that is not trending but which is still liquid.

A spread trade is the simultaneous placing of orders to buy and sell on either side of the spread. The offers are placed at the best prices available. These prices might be separated by more than a tick early in the lifetime of the markets or the prices maybe next to each other nearer then end of the market's lifetime.

Each order is known as a leg and the trade is complete when both legs have been matched. For example, you notice a market where a horse is being traded at 2.8 to lay and 2.78 to back. There are takers of both prices so you decide to place a spread trade. You offer £100 to lay at 2.78 and £100 to back at 2.8 and if both legs are matched then you make a profit of £2, which can be hedged to yield a profit for all horses in the market.

Care must be taken to ensure the market does not suddenly move one way or the other so be prepared to scratch the trade. For example, your lay may get matched at 2.78 but the back price drops to 2.78. You must now change your back position to 2.78 and scratch the spread trade. So long as new money keeps entering the chosen back and lay prices then you can continue making spread trades.

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