Hello Steemians, it's a pleasure and a privilege to be here at the start of a new season, and I hope to learn from such great minds. This week's lesson by prof @awesononso on Bid-Ask Spread, explaining the concept and importance of Spread. I will be doing the Homework Task from the lesson.
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1. Properly explain the Bid-Ask Spread.
Bid-Ask Spread
In all forms of trading, there is the price the buyer is willing to buy a product, and there is the price the seller is willing to sell. This is no different in financial or crypto trading, and the difference between these two prices is called the Spread.
The Bid price is the highest price a trader will pay for an asset, and the Ask price is the lowest price a trader is willing to sell an asset.
The difference between the Bid price and the Ask price is called the Bid-Ask Spread or is usually called Spread. The Bid-Ask Spread is mathematically represented as
Bid-Ask Spread = Ask price - Bid price.
2. Why is the Bid-Ask Spread important in a market?
Bid-Ask spread is essential in the market as it shows the liquidity of the market. If the Spread of a market is tight, it indicates that buying and selling demand is of equal proportion.
A wide Bid-Ask spread indicates disparity in the supply and demand of the asset. A wide Spread shows that fewer traders are willing to buy or sell the asset leading to a low liquidity market.
Generally, a bid-ask spread shows the willingness of traders to buy or sell an asset. A tight Spread shows equal supply and demand, while a wide Spread shows inequality in the supply and demand.
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.
1. Calculate the Bid-Ask Price
Bid Price of Crypto X = $5
Ask Price of Crypto X = $5.20
Bid-Ask Spread = Ask Price - Bid Price
Bid-Ask Spread = $5.20 - $5
Crypto Bid-Ask Spread = $0.20
2. Calculate the Bid-Ask Spread in Percentage
Spread Percentage % = (Spread/Ask Price) x 100
Spread Percentage % = (0.20/5.20) x 100
Crypto X Spread Percentage % = 3.85 %
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.
1. Calculate the Bid-Ask Price
Bid Price of Crypto Y = $8.40
Ask Price of Crypto Y = $8.80
Bid-Ask Spread = Ask Price - Bid Price
Bid-Ask Spread = $8.80 - $8.40
Crypto Bid-Ask Spread = $0.40
2. Calculate the Bid-Ask Spread in Percentage
Spread Percentage % = (Spread/Ask Price) x 100
Spread Percentage % = (0.40/8.80) x 100
Crypto Y Spread Percentage % = 4.55 %
5. In one statement, which of the assets above has the higher liquidity and why?
The asset with the higher liquidity is the Crypto X asset with Spread at $0.2and spread percentage at 3.85%; this is because it has a tighter Spread and lower spread percentage when compared to the Crypto Y asset.
6. Explain Slippage.
Spillage
In trading, traders place a market order to buy or sell an asset at a particular price. Sometimes due to market volatility, the order is entered at a different price; when this happens, it is called Spillage.
High volatility in the market can cause Spillage as the price move quickly, and the set market order is placed at a different price. Spillage can also be caused due to low liquidity in a market, which makes matching orders difficult as there is a disparity in demand and supply.
Slippage is given as the difference between the placed market order price for an asset and the price it is executed.
7. Explain Positive Slippage and Negative slippage with price illustrations for each.
Positive Spillage
Positive Spillage is a type of Spillage that ** favors** the trader as it gives more profit to the trader. For instance, a trader willing to buy an asset at a price and the Spillage causes the asset to be purchased at a lower price, or a trader willing to sell and the Spillage causes the asset to be sold at a higher price than expected.
- Price Illustrations
Trader A places a market order to Sell an asset for $100 and Spillage occurs in the market, and the asset was sold at $101.50. In this case, a positive spillage has occurred as Trader A has made a profit of $101.50 - $100 = $1.50 from the Spillage.
Negative Spillage
Negative Spillage is a type of Spillage that is not favorable to the trader as it brings about a loss to the trader. For instance, a trader willing to buy an asset at a price and the Spillage causes the asset to be purchased at a higher price, or a trader willing to sell and the Spillage causes the asset to be sold at a lower price than expected.
- Price Illustrations
Trader B places a market order to Buy an asset for $100, and Spillage occurs in the market, and the asset was bought at $101.50. In this case, a negative spillage has occurred as Trader B has incurred a loss of $101.50 - $100 = $1.50 from the Spillage.
Conclusion
Spread in financial trading is essential to pay attention to as it indicates the liquidity of an asset then, as trading in a low liquidity market is not advisable.
Spillage occurs in a highly volatile market or low liquidity market. Spillage is the phenomenon where trade is executed at a price different from the price set by the trader. Spillage can be positive or negative as it can favor the trader or against the trader.
Thanks, prof @awesononso.
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