Hi - Are there any good references on how Basis Trading is done, aka the process/pricing of baskets using basis trade methodology with broker. Example, if I have a $500m notional basket to trade and I am execute it via a basis trade, how would I compare the dealers quote to execute this basket (EFP) and what would the basis risk calculation be. If there is an excel spreadsheet, that would be ideal, else any references to basis trading in programs/baskets would be much appreciated.thanks

The basis trade is a special form of the EFP in which you do not take possession of the futures. In an EFP trade that starts with you long stock you exchange your stock position for a futures position. In a textbook example the stock you exchange would be identical to the underlying of the futures contract (i.e. an S&P 500 Index fund exchanged for S&P 500 futures). In this case the EFP quote would be identical to the fair value of the futures contract plus/minus a bid offer spread. If your basket of stocks was not identical to the underlying of the futures then the broker would add something to the fair value plus spread to compensate them for the additional risk they take. What they add is based on their perception of risk at both the trade level and at the firm level (i.e. when they fold this trade into their existing book will it be risk increasing or risk reducing?). Therefore, it makes sense to talk to multiple dealers as their markets may be very different.In the EFP example given above you will be taking possession of the futures contracts. However, not every customer can do that. The basis trade was created to solve this problem. It is priced identically to the EFP, but instead of you taking possession of the futures, the broker liquidates them for you and transfers their economics to the stocks he also buys from you. Effectively, the price of every stock he buys from you is adjusted up or down based on where he executes his futures hedge plus the spread to the futures that he quoted to you.Simple example:Futures = 1000Fair Value = 5Basket Tracking Error to Futures Underlying = 5%Dealer may quote a basis trade price of 4 @ 6 (i.e. f.v. +/- 1) with the futures at 1000.You sell your basket at 4 (above the futures) to the dealer. Dealer now goes out and sells futures. If he sells futures at 999.5 he now marks down the price of the stocks he buys from you by 0.05%. If he sells the futures at 1000.5 he now marks up the price of the stocks he buys from you by 0.05%.I have simplified my example by not including a delta on the basis quote. However, for large moves in the futures fair value does move so there will be a delta involved in any quotes.