Skip to content

The spread: how a price is built

The basis point

A market maker's margin per trade is a fraction of one percent, and it competes over differences smaller than a tenth of a percent. At that scale percentages are awkward to read ("0.25%" versus "0.3%" is easy to misread), so the industry counts in basis points: one basis point (bp) is one hundredth of one percent. 100 bps = 1%. A desk quoting "30 bps" is charging 0.30% over fair value, which on a $10,000 swap is $30.

The desk works in this unit throughout: the margin it charges is tens to low hundreds of bps, and the exchange fees it pays are single-digit bps. Profit is the margin minus those costs.

The spread layers

The spread is assembled per quote from layers, each one pricing a specific risk. The risk layers are summed and clamped between a floor and a ceiling. The desk's hard costs are then added on top, under an absolute cap that no operator can raise:

Risk layers, summed and clamped Pair base · 150 bps the pair's configured margin Size +10 Volatility +8 Inv. skew -12 Stress +25 · expires = 181 bps risk margin Cost layers, added on top so the margin is net of costs Venue fee +4 Funding +2 Settlement gas +1 = 188 bps final on this example quote Floor · 20 bps never below cost plus minimum profit Ceiling · 500 bps the cap on routine widening Hard cap · 2,000 bps an absolute rail, not operator-settable Every issued quote persists this exact breakdown, layer by layer, in USD and bps: any price the desk ever gave can be explained after the fact.
Figure 4. Anatomy of one example quote on a NIGHT pair. Risk layers are clamped; cost layers make the margin net of real costs; the hard cap is beyond every knob.
Layer Today's values The risk or cost it prices
Pair base spread 100–150 bps per pair The configured margin for the pair; overridable per pair, live, from the console
Size tier +0 / +10 / +25 bps Steps at $10k and $50k of trade value: a large trade is harder to hedge, because executing a big offsetting order moves the market against you as you trade it
Volatility overlay 0–100 bps, factor-driven In a fast market, the quoted price ages badly in the seconds before the hedge lands; observed price velocity widens the spread proportionally
Inventory skew ± per-asset cap Leans prices to attract the trades that rebalance the desk's own holdings: slightly better prices for what the desk wants more of, slightly worse for what it has too much of
Peg / basis drift live-measured A stablecoin trading away from its peg; the desk widens while the deviation lasts
Stress overlay 1–1,000 bps, 1–60 min expiry Set by the operator: they declare market stress and widen everything at once, live. A hard cap blocks a mistaken entry, and the auto-expiry means it cannot be left on
Venue fee + funding + gas per venue, single-digit bps The hedge's exchange fee, the expected cost of holding the hedge, and the on-chain settlement fee Abyss pays on the user's behalf: added explicitly so the quoted margin is net of every real cost

The floor (default 20 bps) exists because below the desk's hard costs plus minimum profit, a trade loses money by construction, so no quote may price under it. The ceiling (default 500 bps) bounds routine widening; the stress overlay may exceed it, within its own cap and always under the hard rail of 2,000 bps, which is not operator-settable by design.

Every issued quote persists this breakdown, layer by layer, in USD and bps, so any past quote can be reconstructed.

Maximum trade size

Every pair carries a maximum quote size, overridable live per pair. On top of that, the quote must clear the inventory reservation (the desk holds what it is promising) and the hedge budget reservation (the desk can neutralize the risk). The maximum trade the desk will quote is therefore not a fixed number: it is the smallest of the pair's configured cap, the free inventory, and the free hedge capacity at that moment.