STEEMIT CRYPTO ACADEMY SEASON 4 | BEGINNERS COURSE ; THE BID ASK SPREAD

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INTRODUCTION

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Hi guys welcome to steemit crypto academy season 4 . It's great to be back after the short break. Today's post will be based on the bid ask spread based on a lecture given by professor @awesononso.

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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.

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THE BID -ASK SPREAD

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Before I go into what the bid ask spread is all about ,I'll like to make a reference to our realistic trading . When we go to our markets or maybe even a shop and we see an item we want to acquire, we ask for the price and the retailer gives us a price. Most of us proceed to negotiate for a lower cost. This applies to the crypt market too.

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The price the seller calls is called the ask price, the price that we - the consumer - call is called the bid price. Now let’s consider what spread means. A spread is a difference from one place to another . Adding it to our underlying knowledge of bid and ask, we can now say that the bid ask spread is the region between the bid and ask price.

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Screenshot from steemit wallet

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Mathematically,

Bid ask spread = ask price - bid price

We can also calculate the percentage spread ;

% spread = [(spread)/(ask price)] * 100

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IMPORTANCE OF THE BID -ASK SPREAD

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Now that we understand what the bid ask spread is all about the next question should be what it is really used for in a market.

The main importance of the bid ask spread is to determine the liquidity of a market. Liquidity is the rate at which one can buy or sell an asset . Simply it is how fast trading occurs.

The relationship the bid ask spread has with liquidity is a pretty simple one. The larger the spread then the lower the liquidity. That means , the larger the spread, the slower transactions are completed.On the other hand , the smaller the spread, the higher the liquidity. That is, faster transactions occur at a lower spread .

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PRACTICAL CALCULATIONS OF SPREAD AND % SPREAD

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Since we have covered how to calculate the spread and percentage spread earlier in this post, lets take a look at some practical examples:

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• CRYPTO X

Bid price; $5.00
Ask price; $5.20

Spread = $5.20- $5.00 = $0.20
% Spread = ($0.20/$5.20) * 100
= 0.03846 * 100
= 3.85 %

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• CRYPTO Y

Bid price; $8.40
Ask price; $8.80

Spread = $8.80- $8.40 = $0.40
% Spread = ($0.40/$8.80) * 100
= 0.04545 * 100
= 4.55 %

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Considering both crypto X and Y above , we can see that crypto X has a higher liquidity because of its lower spread which is $0.20 compared to the $0.40 of crypto Y.

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SLIPPAGE

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We know that the crypto market is an highly volatile one and the price changes occur every second. When a market order is carried out at a different price than initially intended due to the rapid change in price , it is known as slippage.

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Let's take an example of a trader that places a market buy order of an asset at $5.00 but due to the fluctuating market,it was executed at $5.05. That is an example of a slippage. Slippages often occur mostly in market with larger spread. That is, the higher the spread the higher the chances if slippage and vice versa.

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TYPES OF SLIPPAGE

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There are two (2) types of slippage;

• POSITIVE SLIPPAGE;

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This type of slippage favors the trader as the name implies. It occurs in both positions of trading. When a positive slippage occurs in a buy position, the asset is bought at a lower price . For example, if the trader files for buy at $5 and the asset buys at $4.95 , it's a positive slippage of $0.05 . On the other hand , if a trader wants to sell for $5 and it sells for $5.05 ,it is a positive slippage of $0.05.

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• NEGATIVE SLIPPAGE;

As the name implies, this type of slippage does not favor the trader. If this happens in a buy position, the market is sold at an higher price. For example, if the order is placed at $5 and it is validated at $5.05, then it is a negative slippage of of $0.05. On the other hand , if it is in a sell position and the order was placed at $5 and it was validated at $4.95 ,it is a negative slippage .

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CONCLUSION

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The bid ask spread is a great way to determine the liquidity of a market. Using the bid ask spread,traders can often estimate how fast their transaction would be validated.

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Slippages always occur in market due to the fluctuating prices. When it favors the trader, uf us positive slippage and when it doesn't favor the trader, it is negative slippage.

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Thank you professor @awesononso for the lecture.