Crypto Academy / Season 4 / Week 1 - Homework Post for @awesononso//The Bid-Ask Spread

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Hello to everyone.I wish to appreciate professor @awesononso for this class.I learnt a lot from it.

Question One

Properly explain the Bid-Ask Spread

In the business world and in the world of service rendering,there exist one common thing called price.The seller mentions a price and the buyers tries to bargain.In most cases the buyer wants to buy at a price lower than the sellers price.

The minimum price that the seller is willing to sell his asset is called the Ask price.On the other hand,the maximum price that a buyer can pay for an asset is called the Bid price.

The difference between the Ask price and the Bid price is called the Bid-Ask Spread or Spread. Mathematical,
Bid-Ask Spread=Ask price - Bid price

Let me use an example to explain Bid-Ask Spread further

•A fish seller marked an iced fish at a price of $100 and would never accept to sell it below that price.This $100 is called the Ask price.

•Miss Ninapenda can only pay $97 for the seller and would never pay more than that.This $97 is called the Bid price

•The Difference between the Ask price($100) and the Bid price($97) is called the Bid-Ask Spread.

Bid-Ask Spread=$(100 - 97)=$3

Whenever the Bid-Ask Spread is low,it means that the trade can easily be executed,it means that trading volume is high and the market is liquid.Look at the INCH/BTC chart below,the difference between Ask price and Bid price is very small(a thin line) meaning that there is more trading volume resulting in a liquid market.

Screenshot Binance.com

Whenever the Bid-Ask Spread is high,it means that trade cannot easily be executed,it means that trading volume is low and the market is Illiquid.Look at the AVAS/BUSD chart below,the difference between Ask price and Bid price is so wide meaning that there is low trading volume resulting in an Illiquid market.

Screenshot binance.com

In summary 👇

Bid-Ask Spread is the total difference between the Bid price ( the price which the buyer is willingly and capable to pay for commodity, service or asset which will be favorable to him) and the Ask price ( price which the seller is willingly to sell the asset, service or commodity which will be favorable to him). Bid-Ask Spread is generally known as Spread.
Bid-Ask Spread= Ask price (Selling price) - Bid price (Buying price)

Question Two

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

Since the Bid-Ask Spread is the difference between the Ask price and the Bid price.It helps a trader to know the difference between the sellers price and the buyers price.

It will also help a trader to know when there a high trading volume or a low trading volume.A high trading volume means that demand and supply are almost in equilibrium(low spread value) and so the market is good.A low trading volume means that demand and supply are miles apart and so the market Illiquid(high spread value).In summary👇

•The Bid-Ask Spread aid the trader to determine the difference between the Bid price and the Ask price.
•It is important and is generally used in the markets to determine how easy commodities or asset can be traded.
•It determines how favorable or less favorable the market is.

Question Three

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:
3a.)The Bid price ( Buyer's price) = $5
The Ask price (Seller's price)= $5.20
Spread= Seller's price - Buyer's price
= $5.20 - $5 = $0.20

3b.) Percentage Bid-Ask Spread (% Spread)=(Spread/sellers price)× 100%
= $0.2/$5.20 × 100%
%Spread= 3.85%

Question four

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:
4a.) The Bid price ( Buyer's price)= $8.40
The Ask price ( Seller's price)=$8.80
Spread= seller's price - Buyer's price
= $8.80 - $8.40
= $0.40
4b.)Percentage Bid-Ask Spread (%Spread) = (Bid-Ask Spread/ Seller's price)× 100%
= $0.40/$8.80 × 100%
%Spread =4.55%

Question Five

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

Crypto X has the higher liquidity because the bid price ( buyer's price=$5) is close enough to the ask price ( Seller's price=$5.20) and the difference (Spread=$0.2) is small when compared to crypto Y with Spread of $0.4.

Question Six

Slippage occurs when buyer's intended price is not what was really executed, it also occurs when the seller's intended price is not what was really executed either the price went higher or lower which makes the market favorable or less favorable. Slippage is also the total difference between the intended price of a trade and the price it later executed.A slippage could be positive or negative.A positive slippage means that it favours the buyer or the seller while a negative means that it does not favour the buyer or the seller.
Example I place a sell order at $10 and it got executed at $9,it means that was not favoured by the slippage because I sold at a price less than my intended sale price(negative slippage).
Example I place a buy order at $10 and it got executed at $9,it means I was favoured by the slippage because it was executed at a price less than the intended buy price.

Question Seven

Explain Positive Slippage and Negative slippage with price illustrations for each

•Positive Slippage:
This occurs when the executed price is favorable than the intended price.
For a sell trade, positive slippage occurs when the executed order result to a higher and better price than intended.
For example, if a trader place a trade on Crypto L to be sold at $199 and later on the trade was placed and executed at the price of $203, the positive Slippage would be
=$203- $199 = $4

For a buy trade, positive Slippage occurs when the executed order result to a lower and better price than intended.
For example, if a trader place a trade on Crypto L to be bought at $203 and later on the trade was placed and executed at the price of $199, the positive Slippage would be;
=$203 - $199=$4

•Negative Slippage:
This occurs when a trade is executed at non-favourable price than the intended price which makes the market ( trade) less favorable.
For a sell trade, negative slippage occurs when the executed order result to a lower and less favorable price than intended.

For example, if a trader place a trade on Crypto M to be sold at $58.3 and later on, the trade was placed and executed at the price of $57, the negative slippage would be;
= $ 58.3 - $ 57 = $1.3

For a buy trade,negative slippage occurs when the executed order result to a higher and less favorable price than intended.

For example, if a trader place a trade on Crypto M to be bought at $57 and later on, the trade was placed and executed at the price of $58.3, the negative slippage would be;
= $ 58.3 - $ 57 = $1.3

Conclusion

Bid-Ask Spread is a measure of the trading volume of the market-whether the trading volume is high or low.In the mathematically approach, Bid-Ask Spread is the difference between the sellers's price (Ask price) and the buyer's price(Bid price).A small Bid-Ask Spread suggests a liquid market while a wide Bid-Ask Spread suggests an Illiquid market.Bid-Ask Spread helps a trader to made a good decision so as to know the right time to buy and sell.