Implied depth

In futures and options markets, implied depth allows for extra liquidity beyond what's visible in the order book for a specific instrument. It is derived from the relationships between different instruments, such as between outrights, spreads, or multi-leg options. Matching engines in exchanges like CME and ICE use implied depth to construct liquidity, ensuring that even if a direct order isn't placed, the system can infer potential liquidity from other related contracts.

• Actual implied depth: When supported by the exchange’s matching engine, implied orders are automatically constructed and published, meaning the engine will match trades involving implied depth. This process is also known as implied matching or implied pricing, allowing participants to trade against this constructed liquidity seamlessly.
• Synthetic implied depth: In some cases, the matching engine doesn't explicitly calculate or publish implied orders, but traders can manually calculate implied liquidity from related instruments (such as outrights or spreads). This synthetic liquidity, often based on arbitrage pricing relationships, provides an opportunity for traders to reduce transaction costs by identifying hidden liquidity.

• First-generation implied depth is directly calculated from the actual orders in the market.
• Second-generation implied depth is derived from a combination of both actual orders and first-generation implied orders.

A matching engine typically doesn’t support implied depth beyond the first or second generation, but sophisticated participants can calculate deeper generations for potential arbitrage opportunities.

• ** Implied in** refers to finding liquidity on a particular instrument based on related instruments.
• Implied out means using the data from the instrument you're looking at to determine liquidity on another instrument.