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

1. PROPERLY EXPLAIN THE BID-ASK-SPREAD.

The "Bid and Ask" are terms used in the marketing of commodities, they are Economic terms.
The "Bid Price" is the maximum price that a buyer is willing to pay for a given commodity at a particular point in time. Therefore the "bid price" is the minimal price that the seller is ready to receive for that same asset or product. The Bid-Ask spread in a general sense, simply means the space or gap between the highest rate that the buyer is ready to provide and the lowest rate that the owner of the goods is ready to take. That gap or difference is also known as the "Spread".
In mathematical terms; the bid-ask-spread is = Ask price - Bid price.

2. IMPORTANCE'S OF THE BID-ASK-SPREAD IN THE MARKET.

• The bid-ask spread helps in diversifying the prices of a particular commodity in the market.

• The bid-ask spread is an important regulator of the liquidity of any commodity in the market. Usually the higher the liquidity of a commodity the more it changes prices and the more buyers price.

• The increasing and decreasing of the spread helps the buyers to know when to place orders for their commodities.

• Typically, the ask rate is slightly higher than the bid rate. The difference between these two prices gives the broker little profit if the transaction had a negative slippage.

3. IF CRYPTO X HAS A BID PRICE OF $5 AND AN ASKING PRICE OF $5.20

a) Calculate the bid-ask spread.
b) Calculate the bid-ask spread
in percentage(%).

Solution

a) calculating the Bid-ask spread of
Crypto X.

= $5.20-$5
=$0.20

b) calculate the bid-ask spread in percentage(%).

Bid-ask spread percentage=
(spread/Ask price)×100
=($0.20/$5.20)×100
=3.85%

4. IF CRYPTO Y HAS A BID PRICE OF $8.40 AND ALSO AN ASKING PRICE OF $8.80.

a) Calculate the bid-ask spread.
b) Calculate the bid-ask spread
in percentage(%).

Solutions

a) calculating the bid-ask spread of
Crypto Y.

= $8.80-$8.40
Spread =$0.40

b) calculate the bid-ask spread in percentage(%).

Bid-ask spread percentage
(spread/ask price)×100
=($0.40/$8.80)×100
=4.54%

5. IN ONE STATEMENT, WHICH OF THE ASSETS ABOVE HAS THE HIGHER LIQUIDITY AND WHY?

In the above question, crypto X has higher liquidity than crypto Y. This is due to the bid-ask Spread value of crypto X which is $0.20 while that of crypto Y is $0.40. Usually the lower the spread value the higher the liquidity and the higher the spread value the lower the liquidity.

6. EXPLAIN SLIPPAGE?

SLIPPAGE

Slippage is the dissimilarity amid the anticipated rate of a commodity and the rate at which the exchange is ultimately carried out. Slippage can occur at any point in a trade, but it is most common during periods of high volatility.
Simply, slippage takes place when there is a change in the bid-ask spread between the time taken for a buyer to place an order and also the time taken for that order to be carried out.

7. EXPLAIN POSITIVE SLIPPAGE AND NEGATIVE SLIPPAGE WITH PRICE ILLUSTRATIONS FOR EACH.

Positive slippage

Positive slippage occurs when your trade is completed at a price that is better or lower than the price you wanted to buy at.
For example, when buying the crypto pairs (TRX/BTC) with a limit order at 1.1755, but the order gets executed at 1.1751. Thus getting you into the trade at a price that is 4 pips( percentage in points) better than your order.

NOTE; Positive slippage occurs at the opening of the trade.

Negative Slippage

Negative slippage is when your trade is completed at a price that is worse or higher than the price you wanted to buy at.
For example when buying the same pair of cryptocurrencies in the example above(TRX/BTC), with a limit order at 1.1755. But the order gets executed at 1.1760, thus getting you with a trade at a price that is 5 pips(percentage in points) higher or worse than your initial price.
Note: Negative slippage occurs at the closing of the trade.

In summary of slippage, positive slippage is an advantage to the trader or buyer because he receives more than the amount he expects. While negative slippage is a disadvantage to the buyer because he receives lesser than the amount he expects. Negative slippage is an advantage to the seller because he gives the buyer lesser than he expects thereby making a profit from the trade.

CONCLUSION

In this post, I was able to explain in detail the Bid-ask spread, its importance in trading, and also how it can favor a buyer or otherwise favor a seller during a trade. Examples of Bid-ask spread and their solutions were also illustrated.
I explained slippage and its two major types which are Positive and negative slippage. The crypto market pairs of (TRX/BTC) were used as an example with entry prices for a better understanding.