Crypto Academy /Season 4 / Week 1 - Homework Post for Professor [@awesononso] || Bid- Ask Spread

I am excited to participate in season 4 week 1 of the cyptoacademy. this is my homework post

1. Properly explain the Bid-Ask Spread.

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Before I give an accurate definition of what I feel is the Bid-Ask Spread, I would love to help us understand what bid and ask spread is all about using a real-life scenario; For instance, Mr Choco has only but $10 to pay for a cup of ice cream, take note that this is the highest amount of money he has budgeted to buy a cup of ice cream and Mr Beans sells his ice cream at $12 per cup, take note that is the lowest amount that MrBeans is willing to sell. At this point, the spread is the difference between the two prices.

having understood the illustration, I will be defining the Bid-Ask Spread as the difference between the supply and demand of a particular asset, security or commodity. so when the spread is low, it shows that the demand is high vice versa when the spread is high, it shows that the demand is low and it will affect the price of the commodity or asset

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

it is very important in the market for various reasons, I will mention but a few

1. BROKERS REVENUE
The Bid-Ask Spread is important in the market as the market makers or brokers generate revenue from the bid-ask spread as the spread determines their profit.

2. RISK EVALUATION
As we are all aware that every buyer desires to buy the asset at the closest price possible, so if peradventure the margin of the spread is high, it entails higher risk and should be watched and evaluated. so the Bid-Ask Spread aids in the risk evaluation of the market.

3. LIQUIDITY
The bid-ask spread in the market helps to determine the liquidity of an asset. so the smaller the spread, the more liquid the asset and vice versa

3. if Crypto X has a bid price of $5 and an asking price of $5.20,

a.) Calculate the Bid-Ask spread.

from the question above,
Bid price = $5
Ask price = $5.20

the formula to identify the bid-ask spread;
Ask price - Bid price =Spread
$5.20 - $5 =0.20
Spread = 0.20

b.) Calculate the Bid-Ask spread in percentage.

Bid-Ask Spread percentage = (Spread/Ask price) x 100
(0.20/5.20) x 100
0.03846 x 100 = 3.846%

Bid-Ask Spread Percentage = 3.846%

4. if Crypto Y has a bid price of $8.40 and an asking price of $8.80,

having given all the formulas in question 3 above, I will go straight to the solving here

a.) Calculate the Bid-Ask spread.

$8.80 - $8.40 = $0.40

b.) Calculate the Bid-Ask spread in percentage.
($0.40/$8.80) x 100 = 4.545%

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

I can say that Crypto X has higher liquidity than Crypto Y because it has a lower bid-ask spread than Crypto Y

6. Explain Slippage.

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before I go deep into the definition and explanation of slippage, I will like to bring to our knowledge that one of the major causes of slippage is an unexpected or sudden change in the bid-ask spread that we have discussed above
so, for instance, Mr Choco as I always use for my illustration made a market order of $50 on a volatile asset and due to the rapid shift of the bid-ask spread, the volatile asset shifts to $50.05, the order is now filled at 50.05. that difference is called the SLIPPAGE

so therefore a slippage in simple words can be said to be the difference between the rapid change in the market price of an asset and the intended market price

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

POSITIVE SLIPPAGE

A positive slippage could be said to occur when the conditions of the slippage are to the benefit of the trader, to that effect we could say for a buyer a positive slippage could mean an order being filled at a lower price rather than the intended price and for the seller, it could mean an order being filled at a higher price rather than the intended market price. we could use an illustration below

let us say Mr Choco intends to buy BNB at $9.35 with the market order and slippage occurs leaving the asset to a bid price of $9.31. in this case, it is seen as positive slippage for Mr Choco
likewise assuming Mr Beans decides to sell an asset at a market order probably BNB at $80 and slippage occurs leaving the asset to an asking price of $85. in this case it is seen as a positive slippage for Mr Beans

NEGATIVE SLIPPAGE

A negative slippage could be said to occur when the conditions of the slippage are to the demerit of the trader, to that effect we could say for a buyer a negative slippage could mean an order being filled at a higher price rather than the intended price and for the seller, it could mean an order being filled at a lower price rather than the intended market price. we could use an illustration below

let us say again Mr Choco intends to buy BNB at $9.35 with the market order and slippage occurs leaving the asset to a bid price of $9.40. in this case, it is seen as negative slippage for Mr Choco
likewise assuming Mr Beans decides to sell an asset at a market order probably BNB at $80 and slippage occurs leaving the asset to an asking price of $75. in this case it is seen as a negative slippage for Mr Beans

Best regards
@awesononso