Paradigm’s leg pricing methodology attempts to take the quoted strategy prices as entered by the maker and calculate individual leg prices subject to the following broad constraints:
Calculate leg prices as close to the mark as possible
Leg prices must be in increments of minimum tick size
Leg prices must be within the Min and Max prescribed by the exchange for each leg
For options strategies, leg prices must preserve delta relationships:
- Higher strike puts > Lower strike puts
- Higher strike calls < Lower strike calls
Important Pricing Points to Consider
Trade rejection due to timing differences between initial Price Band check (on Paradigm) and final price band check (on Deribit)
- After the Maker enters executable prices, Paradigm conducts a price band check for the quoted strategy to ensure that the price(s) entered by the Maker are within the permissible price bands set by the exchange. These price bands are calculated by Paradigm using the Min and Max of the individual legs in the strategy.
- However, Deribit performs its own price-band check at the time of trade execution i.e AFTER the trade message is submitted to Deribit.
- Consequently, there is a time lag between the initial price band check performed by Paradigm (after Maker enters executable prices) and the price band check performed by Deribit (at the time of trade submission). This time lag may vary depending upon when the Taker decides to confirm the price, but is capped at a max of 20* seconds (plus a minimal amount of time it takes for Deribit to receive the trade message transmitted by Paradigm
- During this time, there is a chance that the price bands for the individual legs (have changed meaningfully enough to cause the executed price to be outside the new price bands for the quoted strategy. If this is true, Deribit will reject the trade.
* 20 seconds corresponds to the longest setting for the trade execution window on Paradigm, configurable via the web dashboard.
Manual entry for individual leg prices when Paradigm is unable to calculate leg prices that are “sensical”
- Deribit’s Min/Max values for certain strikes in the option chain can overlap (i.e. Max of lower strike put can be higher than Min of higher strike put). As a result certain strategies prove difficult to calculate leg prices that satisfy conditions stated above (1,2,3) and also specifically preserve delta relationships (4).
- In these rare instances, Paradigm will ask the Maker to input individual leg prices and submit those prices to Deribit. Note that in such cases, Paradigm DOES NOT do any checks to ensure that the leg prices preserve delta relationships and prices will be submitted on an “as is” basis.
Currently, Paradigm does not allow zero or negative prices for the following strategies
- Non-ratio, single-expiration Put and Call Spreads