1. Properly Explain the Bid-Ask Spread
Essentially, the BID Is the price that someone is willing to buy for the share, and the ASK is the price that someone is willing to sell for that share. Thus, it can be said that the BID-ASK SPREAD or named it as SPREAD is the price gap between the bid price and the ask price. To understand a little bit more, let’s take a look at this example; ASK=$20,98 – BID=$20.90 = $ 0.08, the price of $0.08 is the Spread where the market markers get paid to finalize the order, or this is the fee paid by traders to which broker for using their services. The smaller the spread, the more potential profits you get.
2. Why is the Bid-Ask Spread Important in a Market?
The Bid-Ask Spread is considered as tools to measure the supply and demand in a market, automatically Bid and Ask are have the influence the Bid-Ask Spread. Spreads can widen significantly if fewer participants place limit orders to buy the security (thus resulting in less bid prices) or if fewer sellers place limit orders to sell. Therefore, it is very important to keep the bid-ask spread in mind when placing a buy limit order to ensure it is executed successfully.
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
Solution
a.) Bid-Ask spread: Ask price – Bid Price: $5.20 - $5 = $0.20
b.) Bid-Ask spread in percentage: %Spread = (Spread/Ask Price) x 100
= ($0.20/$5.20) x 100
= 0.0038 x 100
= 0.38%
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
Solution
a.) Bid-Ask spread: Ask price – Bid Price: $8.80 - $8.40 = $0.40
b.) Bid-Ask spread in percentage: %Spread = (Spread/Ask Price) x 100
= ($0.40/$8.80) x 100
= 0.0454 x 100
= 4.54%
5. In one statement, which of the assets above has the higher liquidity and why?
The higher liquidity is: Cripto X
The price differences between ASK price and Bid Price will be influence of the market liquidity. The smaller spread you have, then the more liquid asset/crypto you have and the more profit you will get, as that’s the market expected.
6. Explain Slippage
There is a difference in the price desired by the trader with the actual price at the time of execution. The slippage will be appeared anytime due to market imbalance or volatile, for example the number of traders and demand between the seller and the buyer has big difference. The more slippage you made, the more cost that you will be count for. Executing the Limit orders is one way to reduce the risk of slippage. Normally, it is done by the traders to open new positions or close existing profitable positions. This limit order can be executed when the ask price is better than the previous price.
7. Explain Positive Slippage and Negative slippage with price illustrations for each.
Positive Slippage: it is occurred when order was placed, but the best bid price suddenly changed unexpectedly, while the order was then filled at a better price. For example: you place the order to buy $135, but then executed final on $131. Positive Slippage: $135 - $131 = $4, it is 4 points lower than the asking price.
Negative Slippage: when the order was placed, but the best bid price offered, suddenly changed for some points unexpectedly as it brings you big loss. For example: you place the order to buy cost you $82 then the order changed unexpectedly to $90. Negative Slippage: $90 - $82 = $8, it is 8 points above the asking price.
Thank you Professor @awesononso for the homework, i really enjoy it.
Hello @diegopreman,
Thank you for taking interest in this class. Your grades are as follows:
Feedback and Suggestions
You really should have done more on the topic. There are points that are missing and others that are not very clear.
I noticed some parts that were paraphrased from other sources.
A better understanding of the topic is recommended.
Thanks again as we anticipate your participation in the next class.
Thank you for your suggestion Professor, i should have add the source and copy the link of the contents, next time i will improve it.