Steemit Crypto Academy [Beginners' Level] | Homework Post for @awesononso - The Bid-Ask Spread

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Introduction

Hello to everyone,

We started the new season of Crypto Academy with very good lessons. One of these beautiful lessons is professor @awesononso's lesson this week. In this lesson, it is about The Bid-Ask Spread, which is among the topics that we all know but have difficulty understanding. The professor explained all the necessary information about this subject in detail in his lecture. Now, I will try to convey the tasks given to us by the professor in an understandable language in this post.

Thank you in advance to everyone who reads my homework. Also thank you professor @awesononso for this nice lecture. I wish you all a healthy and beautiful day.

Let's Get Started.

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Question 1

Properly eplain the Bid-Ask Spread

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Before trying to understand what The Bid-Ask Spread is, the first things we need to know are what the bid price and the selling price are. Therefore, I will give brief information about them.

The Bid Price

The bid price refers to the price that those who want to buy a commodity (asset), that is, the buyers, are ready to pay for the asset they will receive.

For example:

• We want to sell any crypto assets. When selling this asset, we need to know how many people are ready to buy it and how much they are offering. It is possible to see these people and the prices they give in the crypto asset market. These bid prices represent the prices that people are willing to pay for the crypto-asset being sold. Bid price is the highest price you are willing to pay for the asset sold at this point.

The Ask Price

The selling price is the price at which people who own an asset (commodity), i.e. investors, agree to trade or sell their assets.
For example:

• We want to buy any crypto assets. When buying this asset, we need to know how many people are ready to sell it and how much they are offering. In the crypto asset market, it is possible to see these people and the prices they are ready to sell. Among these given prices, the lowest price at which the seller is ready to sell the crypto asset is ask price.

The Bid-Ask Spread

I think we fully understand what The bid price and The ask price mean with the examples we gave. The simplest definition of The Bid-Ask Spread is the difference between the buy (the bid) and the sell (the ask) prices.

Spread formula and Spread percentage formula are as follows.

• The Bid-Ask Spread = The Ask Price – The Bid Price
• The Bid-Ask Spread %= ((The Ask Price – The Bid Price )/ The Ask Price) x 100

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Question 2

Why is the Bid-Ask Spread important in a market?

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The Bid-Ask spread is very important in the financial market and crypto market. As we mentioned in the previous examples, market makers set the price at which they want to buy or sell an asset, thanks to limit orders. The market maker who wishes to place a buy order places the bid price for the buy transaction. In the same way, if the market maker wants to place a sell order, he gives the ask price for the sales transaction. The difference between these two orders is called the spread on the asset. This is a fairly simple issue, but one to be mindful of when trading. Because when we buy an asset with a high spread, we may want to sell this asset back immediately. However, if it is an asset with a high spread, we may have to sell this asset at a price below the price we bought it. Therefore, it is possible for us to lose. Now, if we list the importance of Bid-Ask Spread;

• It is among the important parameters used to measure the liquidity of an asset. Because the lower the spread of an asset, the higher the trading volume and our orders are filled quickly. Therefore, we can say that the Spread is a low asset liquidity.
• As we said before, when we buy an asset and want to sell it back immediately, our risk of loss is proportional to our spread. Because the higher the spread, the higher the difference between the buying and selling price.
• It can help us on how to buy and sell an asset during our trades. In a market with a high spread, it is more reasonable to buy/sell with a limit order. In a market with a low spread, trading with market orders can bring good profits, even if they are more costly.
• We can determine the trend of the market by following the spread rate. This is fairly easy to determine, as the spread is directly proportional to trading volumes and inversely proportional to liquidity.

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Question 3

If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.

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The Bid Price Crypto X = 5 USD
The Ask Price Crypto X = 5.20 USD

a)

The Bid-Ask Spread = The Ask Price – The Bid Price

• If we substitute the values in the above formula;
  The Bid-Ask Spread = 5.20 USD – 5 USD
  The Bid-Ask Spread = 0.20 USD
  As a result, Crypto X's The Bid-Ask Spread is 0.20 USD.

b)

The Bid-Ask Spread % = ((The Ask Price – The Bid Price )/ The Ask Price) x 100

• If we substitute the values in the above formula;
  The Bid-Ask Spread % = (0.20 USD / 5.20 USD) x 100
  The Bid-Ask Spread % = (0,03846154) x 100
  The Bid-Ask Spread % = 3.84615385
  As a result, Crypto X's The Bid-Ask Spread % is approximately 3.85%.

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Question 4

If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.

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The Bid Price Crypto Y = 8.40 USD
The Ask Price Crypto Y = 8.80 USD

a)

The Bid-Ask Spread = The Ask Price – The Bid Price

• If we substitute the values in the above formula;
  The Bid-Ask Spread = $8.80 – $8.40
  The Bid-Ask Spread = $0.40
  As a result, Crypto Y's The Bid-Ask Spread is 0.40 USD.

b)

The Bid-Ask Spread % = ((The Ask Price – The Bid Price )/ The Ask Price) x 100

• If we substitute the values in the above formula;
  The Bid-Ask Spread % = (0.40 USD / 8.80 USD) x 100
  The Bid-Ask Spread % = (0.04545455) x 100
  The Bid-Ask Spread % = 4.54545455
  As a result, Crypto X's The Bid-Ask Spread % is approximately 4.5%.

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Question 5

In one statement, which of the assets above has the higher liquidity and why?

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Crypto X is more liquid. Because Crypto X's The Bid-Ask Spread has a lower percentage (3.85%). As we said before, the spread value tells us the percentage of the difference between the bid and the ask price values. The lower this spread value, the higher the trading volume of the market. The market with high trading volume has high liquidity. Therefore, we can say that Crypto X has higher liquidity.

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Question 6

Explain Slippage.

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Slippage means the execution of our transaction at a price below/above the buy/sell price we demand for an asset during our trades on the financial asset. Such slippages usually occur in very fast moving markets or markets with volatile price action. The reason for such shifts is usually the difference between the time we give the orders and the time they are executed. In this temporal interval, market activity continues, so these shifts occur.

We cannot say that slippage is always harmful. Sometimes, when we place a buy order for an asset, it can happen at a lower price. Sometimes, when we place a buy order for an asset, it can be done at a higher price. Although we may seem profitable in such cases, there is no guarantee of this. In the same way, the asset that we have given a buy/sell order can be sold at a price below the sales price we want, or we can make a purchase above the purchase price we want.

Shifts generally occur in illiquid markets. Because the trading volume in such markets can be quite low and it may take more time for our buy/sell orders to be executed. We can also say that slippage takes place in markets where bid-ask spreads are high.

There are many ways to avoid slippage. At the beginning of these, we can prioritize price changes by executing our trades using the "limit-order" command. Our preference for markets with a narrow bid-ask spread, that is, a low spread percentage, protects us from slippage.

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Question 7

Explain Positive Slippage and Negative slippage with price illustrations for each.

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As we said in our previous section, Slippage is not always profitable or harmful. For this reason, it is called positive and negative slippage.

Positive Slippage

This type of slippage is a positive (profitable) slippage. As we have said before, it is the realization of a buy/sell transaction at a better price than a buy/sell price that we have stated on the market.

For Example;

• Investor wants to buy a crypto asset. He wants to buy this crypto asset at $200 and places a buy order at $200. But the order is filled at $190. This results in a $10 Positive Slippage**.

• Likewise, the investor wants to sell an asset at $200 and places a sell order at $200. However, the order is filled at $210. This results in a Positive Slippage of $10 again.

Negative Slippage

This type of slippage is a negative (harmful) slippage. As we have said before, it is the realization of a buy/sell transaction at a price worse than a buy/sell price that we have stated on the market.

For Example;

• Investor wants to buy a crypto asset. He wants to buy this crypto asset at $200 and places a buy order at $200. However, the order is filled at $210. This results in a $10 Negative Slippage**.
• Likewise, the investor wants to sell an asset at $200 and places a sell order at $200. But the sell order is filled at $190. This results in another $10 Negative Slippage**.

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Conclusion

In this post, we have discussed in depth the subject of The Bid-Ask Spread, which the professor has covered. In this post, we explained in detail what the bid-ask spread is and the calculation method. Then what is Slippage and what are its variants? I think I have done a narrative where we can get the answers to questions like these.
While our lesson this week may seem simple, it is actually among the basics and it is useful to know what these topics mean during our trading.

Thanks again to everyone who read my post and to the professor.

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CC: @steemitblog @awesononso