Steemit Crypto Academy Season 4 Week 1 | The Bid-Ask Spread- Homework post by @desiigner
Properly explain the Bid-Ask Spread.
Why is the Bid-Ask Spread important in a market?
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.
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.
In one statement, which of the assets above has the higher liquidity and why?
Explain Slippage.
Explain Positive Slippage and Negative slippage with price illustrations for each.
Bid-Ask Spread
A Bid price refers to the highest offer submitted by a buyer to purchase a commodity , The Ask price on the other hand is the lowest or smallest price for a commodity estimated by the seller, in other words the Ask price is the lowest price the Seller is willing to trade a commodity for. The Bid price is also set to a price lower than the Ask price by the buyer. The Bid-Ask Spread also called Spread is the significant difference between the Bid and Ask Prices, which can be represented Mathematically as Bid Ask Spread = Ask Price - Bid Price
From above I’ve indicated the Bid the Ask and the spread with arrows . You can see the Bid to be $0.080834 and the ask price to be $0.81015 and the Bid-Ask Spread/Spread is 0.224%.The green Portion of the Chart below the prices represents the Ask Price by the Seller and the Red portion represents the bid price and the space between the two prices is is the Spread which is very little in the screenshot. In no case that the Bid price will be the same as the Ask Price as both parties will always want a price that will favor them.
why Bid-Ask Spread is important in a market
- The bid ask Spread assists Traders to make good transactions by showing the price at which a buyer is willing to purchase a commodity and also the price at which a seller is willing to give out a commodity for. It helps traders to determine whether or not a market has liquidity.For instance,
A Very little Spread will mean that particular market has liquidity and there’s no much difference between the desired prices for the commodity of both the buyer and a seller which makes it approving to both of them and the transaction will go through quickly.
Otherwise, if the Bid-Ask Spread is large it means that the difference between the desired price for the commodity of both parties are large and it will be very difficult for the transaction to pull through quickly.
3. If Crypto X has a bid price of $5 and an ask price of $5.20,
a. Bid-Ask Spread
Bid-Ask Spread is the difference between the Ask Price and the Bid Price which implies:
Bid-Ask Spread = Ask price - Bid Price
Ask price =$5.20 and Bid price =5.0
Bid-Ask Spread = $5.2 - $5.0
Bid-Ask Spread = $0.2
b. Spread in Percentage
Percentage Spread = (Spread/Ask Price) x 100%
From the first part
Spread = $0.2
Ask Price = $5.2
Percentage Spread =(0.2/5.2) x 100%
Percentage Spread = 0.038461538461538 x 100
Percentage Spread = 3.846153846153846 %
Approximately , the Percentage Spread =3.846%
4. If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a. Bid-Ask Spread
Bid-Ask Spread = Ask price - Bid price
Ask price =$8.80 and Bid price = $8.40
Spread = $8.80 - $8.40
Spread = $0.40
b. Percentage Spread
Percentage Spread =(spread/ask price) x 100%
Spread = $0.4
Ask= $8.80
Percentage Spread =(0.4/8.8) x 100%
Percentage Spread = 0.045454545454545 x 100%
Percentage Spread = 4.545454545454545%
Approximately Percentage spread= 4.545%
In one statement, which of the assets above has the higher liquidity and why?
From the above the Bid-Ask Spread of crypto Y is wider than that of crypto X which implies that crypto X has more liquidity than crypto Y.
Slippage
Crypto assets are always unstable and can change within any given time. Traders usually establish trades at the market order. Which means they conduct trades at the current market price of the commodity they’re trading. There is usually a delay between when the order is placed and when the order gets traded , within the time of the delay the prices of the commodity can change , in that case that is Slippage.Slippage occurs when a particular order is executed at a price different from the initial market order a commodity was placed at by a trader.
Positive and Negative Slippage
Positive Slippage:
Positive Slippage occurs when an order is executed at a more favorable price than the initial price intended by the trader. A positive Slippage can either favor a buyer or a seller In a sense that if a buyer place an order for a commodity then it gets executed at a lower price than the initial price it favors the buyer on the order hand if a Seller places an order then it gets executed at a price higher than the intended price then it favors the seller, both cases are positive Slippage.
For instance, I placed an order for 45 Steem at $26 then the order gets executed at $23 .
Positive Slippage = $26 - $23= $3.
Conversely
If I placed an Order for 45 Steem to be sold at $27 the it gets executed at $29
Positive Slippage = $29 -$27 = $2
Negative Slippage:
Negative Slippage occurs when an order is executed to the disadvantage of the trader either buying at a higher price than the intended price or selling at a lower price than the intended price.
For instance , an order was placed for SBD to be bought at $75 then the order got executed at $76
The negative Slippage therefore is :
$76 - $75 = $1
An order was placed for SBD to be bought at $50 then the order got executed at $52 The negative Slippage therefore is :
$52 - $50 = $2 .
Conclusion
Best regards to professor @awesononso for the exclusive lecture on Bid-Ask Spread and I hope I’ve covered all parts the questions required.