The Bid Ask Spread (Part II)- Steemit Crypto Academy- S4W3- Homework Post for @awesononso

1. Define the Order Book and explain its components with Screenshots from Binance.

An order book refers to a list of orders for a particular crypto asset pair that are pending to be filled or completed. The order book contains different price ranges of orders placed by traders. It is divided into 2 parts; a green and a red side, which are the bid-price and ask price, respectively. The buy orders are represented by the bids, while the sell orders are represented by the asks and they therefore depict the exchange's connection involving buyers and sellers of an asset pair. The highest Bid and Ask prices can mostly be seen on top of the order book.

The order book can be used by traders to determine the market trend for a particular cryptocurrency asset. When the sell orders are more than the buy orders, then there is a possibility of a downtrend since most investors are exiting the market. On the other hand, if the buy orders are greater, then there is a possible uptrend since investors are holding.

The order book provides very key information on the liquidity of the market. The more quickly orders are filled, the more liquid the market and vice versa. Because they all fulfill comparable functions, the order books of the different exchange platforms are created with similar characteristics.

Components of the Order Book on Binance Exchange

The Bid Side

The bid side of the order book is represented in a green pigment color, which contains all open buy orders. It can be located at the left-hand side of the order book, and contains the bid price, bid quantity, and total amount. It is arranged in ascending order, with the highest being at the top of the order book.

Ask Side

This side of the order book is represented in a red pigment and can be located on the right-hand side of the order book, which contains all open sell orders arranged in an ascending order with the highest bid price being on top of the order book. It also has the price, amount, and total.

2 Who are Market Makers and Market Takers?

In the world of cryptocurrency, it is being driven by two components, which are: market makers and market takers, and each is elaborated on below.

Market makers

Market makers are investors or traders on the crypto market that create their own orders on the market on a particular cryptocurrency pair, disregarding the current Bid/Ask price for that asset. They alter the bid and ask prices in order to achieve a target amount when placing an order, thereby adding more liquidity to the market. For example, a trader can change the current ask price of 1 BTC from $42,000 to $40,000. Hence, if he places an order for $40,000, if the price of 1 BTC changes to $40,000, he gets a target amount of 1 BTC.

Market takers

These users are in compliance with the market price of cryptocurrency pairs; hence, they do not alter or change the Bid/Ask prices when placing orders. They are the direct opposite of the market makers. Market takers tend to have their orders filled very quickly as compared to the orders of market makers.

3 What is a Market Order and a Limit order?

The Market Order

This is a type of order that is completed as soon as it is placed. These orders are executed so quickly that they sometimes do not appear in the order book. The market order was executed with regard to the current market price. However, the target price of the user may not be achieved as prices can change when the order is about to be executed, hence an increase or decrease in the target amount expected by the trader.

Limit order

This type of order allows a trader to buy/sell at his/ her intended price, disregarding the current market price. These types of orders do not execute quickly as compared to market orders. One of these reasons can be associated with the higher spread difference in limit orders, indicating that liquidity is very low. However, when the transaction is filled, the investor gets the amount he intended at the end of the transaction.

4 Explain how Market Makers and Market Takers relate with the two order types and liquidity in a market.

Market makers can be associated with limit orders since they do not regard the market price and enter the prices that suit them. The liquidity of the limit order is very low since the Bid-Ask spread difference is high. Therefore, the market makers have to wait patiently till the price on the other is reached, before the order is filled or completed.

Market takers can also be linked with the market order, since they are in agreement with the current prices in the market. The liquidity in the market is very high as there is a low spread difference. The order is filled quickly without the trader even realizing.

1. Place an order of at least 1 SBD for Steem on the Steemit Market place by
   a) accepting the Lowest ask. Was it instant? Why?
   b) changing the lowest ask. Explain what happens.
   (Make sure you are logged in to your wallet).

In regards to this, we are tasked with setting a buy order of 1 SBD with the current lowest bid price.

To be able to do that, we first have to login into our wallet to perform this transaction.

• Click on the SBD where the balance is located.

• Click on market, for the market to open

• Click on lowest ask and key in 1 as your amount of sbd you want to trade, then click on buy steem

• Click on Ok to confirm the transaction

• A confirmation window pops up for you to key in your private active key to execute the transaction and click on sign in for it to be executed.

Observation

During execution, after accepting the lowest ask price, the price changed from 0.081723 to 0.081719 and did not immediately execute it, but rather placed it in the order book, so my order became a limit order in this case. The order was successful in an hour time.

6 Place a TRX/USDT Buy Limit order on the Binance exchange for at least $15. Explain your steps and explain the impact of your order in the market. (Give Screenshots).

Placing an order of 1 sbd for steem by changing the lowest ask.

In order not to bore you with much repetition of steps, lets jump straight to the steemit market.

Initial price

my set bid price

• At the buy Steem Steem screen, I changed the current asking price of 0.081722 to 0.078000 and entered 1 as the sbd amount before clicking on buy Steem.

• Click on OK to confirm.

• Key in your private active key to execute the transaction, for the order to be created.

• The Order was created and recording in the order book and will be filled when it hits the price target. In this instance, per the definition of a market maker, I become one and there adding more liquidity to the market.

Placing A TRX/USDT Buy Limit Order On The Binance Exchange And The Impact Of The Order.

I will be using the mobile version of the binance exchange market to perform this task.

• login into your account

• on the search bar, search for TRX/USDT

• After click on the TRX/USDT pair, click on Buy

• By default the buy is set to Limit, then key in the amount you are going to buy, in this case we are buying 20USDT.

• Click on Buy TRX for the transaction to proceed.

• Click on Confirm

• At this point our order was placed and was placed in the order book

Impact

Since the trade didn’t fill immediately but rather was kept in the Order Book as there was a slight change in price during the time of execution which would be filled when the price target hits. As usual using the Limit Order am acting the as a market maker and adding more liquidity to the market.

7 Place a TRX/USDT Buy Market order on the Binance exchange for at least $15. Explain your steps and explain the impact of your order in the market. (Give Screenshots of the completed order).

• Before we would be able to perform this, we have to as well login into our accounts again.

• After clicking on our TRX/USDT pair, we click on Buy*

• Then change the limit to market

• key in the amount in usdt you wish to buy, i.e 20usdt

• click on Buy TRX

• Click on Confirm for the order to be placed.

Impact

What I observed when I used the Market order, it immediately executed the trade by using the current market price, which in this case I was serving as a market taker by consuming more and more liquidity.

1. Take a Screenshot of the order book of ADA/USDT pair from Binance on the day you are performing this task. Take note of the highest bid and Lowest ask prices:
   a) Calculate the Bid-Ask.
   b) Calculate the Mid-Market Price.

ADA/USDT BREAKDOWN

Bid = 2.259USDT

Ask =2.260 USDT

A) Bid Ask = Ask -Bid

Bid Ask = 2.260 - 2.259

Bid Ask = 0.001 USDT

B) Mid-Market Price = (Bid + Ask)/2

Mid-Market Price = (2.259+2.260)/2

Mid-Market Price = 2.2595 USDT

Conclusion

To conclude, this lecture has been an eye opener to the Bid-Ask Spread and the order book, as often much attention is not paid to it.

Cc:
@awesononso