Because FIFO leg orders are firm orders. Exchange spreads are conditional (implied) because they require all the legs to be firm orders in order for the exchange to safely match them into the desired spread combination. If you use a platform like TT where you can elect to show the "implied" orders you could see where the volume on a leg is actually larger than the firm FIFO amount shown otherwise. That's why if you are tracking volume it's quite common to see more size traded at a leg price than what is shown bid or offered. Furthermore, it is common for pro-rata algorithms have a time-stamped order queue firm component to them - these are called "enhanced" pro-rata. In other words, for the Euribor it used to be that the first 200 are FIFO but the remaining balance is pro-rata. Not all exchange spread orders are matched pro-rata. It depends on the product. Exchanges will frequently use a pro-rata algorithm in order to encourage "quote stuffing" liquidity. This is done because to attract larger commercial and HF spread order flows. Whales may not want to bother with a few minnows, but they might be attracted to a large school of minnows able to be gulped in one easy bite. Exchanges get paid on filled orders.
Is this true at the CME? If I want to buy CL K/M and someone wants to sell then its matched. No legs. That K/M spread price is used to calculate implieds for the legs which are porpagated to the leg quote
Great point and you are absolutely correct for orders entered as spread buys matched to orders entered as spread sell orders. That's just a straight up matching deal like flat price. I was simply referring to the exchange algorithm matching circumstances where an exchange fills, let's say for example, a spread order from individual component legs. That is quite common in the interest rate markets.
i did this years ago; might be useful to understand implieds by connected nodes http://bit.ly/2LFEyjX
I think the fifo vs pro-rata is a matching hack. I.e. when the spread order lines up, there are probably tons of MMs who are trying to buy/sell the implied price so they can flip it in the outright market, with the spread being tighter and the spread order size being a limiting factor.