Scaling a Systematic Conversion: Solving the "Starvation Paradox" and NBBO Liquidity Constraints

Hey everyone,

I’ve been refining a systematic options backtest focused on relative value premium capture and am looking for feedback on execution assumptions.

I'm using ThetaData NBBO quote history and simulating to understand how the strategy handles real-world liquidity.

Strategy Concept

Delta-neutral multi-leg option structures designed to isolate relative value between listed options and underlying financing.

Universe:
High-volume index ETFs (SPY, QQQ).

Duration:
Short-dated expirations (1–3 DTE) to maximize theta velocity while keeping margin usage efficient.

Execution Logic

COB Orders

Entire structure is submitted as a single complex order (COB) rather than legging.

Orders are staged prior to the open (~8:55 AM ET) based on the previous session’s analysis.

Fill Assumptions

To remain conservative:

• Buys assumed at Ask
• Sells assumed at Bid
• No midpoint or price improvement assumed

Liquidity Constraints

Displayed NBBO size is treated as a hard cap.

Example:

If NBBO size shows 15 contracts, backtest fills maximum 15.
No assumption of hidden liquidity or ability to sweep multiple levels.

Entry Criteria

Trades are entered only if expected yield clears a hurdle after accounting for:

• 4% annualized financing cost
• ~$0.03/contract clearing + exchange fees

Risk Controls

Strike selection constrained to a defined delta band to maintain capital efficiency and margin stability.

Current Results

Backtests across several 2025 periods show promising spreads but low utilization (~10–15%).

The system appears liquidity constrained rather than capital constrained.

Increasing trade limits mostly increases queue competition rather than deployed capital.

Questions

1. COB Queue Priority

If COB orders are staged pre-open (8:55–9:00 ET), how realistic is it to assume reasonable queue priority at the open?

Do market makers typically adjust quotes fast enough to push these orders effectively to the back?

1. Execution Timing

For systematic books trading fixed structures, is there any meaningful advantage to submitting orders earlier than ~9:00 AM ET?

Or does most usable liquidity only appear after spreads normalize post-open?

1. Backtest vs Live Execution

When moving from NBBO-based backtests to real COB execution, what are the biggest microstructure gaps you've seen?

Examples I'm thinking about:

• Hidden liquidity
• Queue priority effects
• Adverse selection around the open

Would appreciate insights from anyone who has run systematic box, conversion, or synthetic financing strategies in listed index options