Greetings dear Steem Academians. It is a pleasure to begin this new season with all of you. Without much dilly dally, I present to you my homework post for Professor @awesononso.

_{Created using PixelLab}

The Bid-Ask Spread by @rosita-nkefor

Homework

1) Properly explain the Bid-Ask Spread.
2) Why is the Bid-Ask Spread important in a market?
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.
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.
5) In one statement, which of the assets above has the higher liquidity and why?
6) Explain Slippage.
7) Positive Slippage and Negative slippage with price illustrations for each

1. Properly explain the Bid-Ask Spread.

When we discern "Bid-Ask Spread", three words come to mind; bid, ask and spread.

• Bid can be seen as the price that a buyer is willing to pay for something as can be seen in auctions.
• Ask is the price that the seller is asking for a good or service.
• Spread can be defined as the area between one border to another e.g we spread butter on bread from one corner to the other.

Having defined these keywords, what then is the Bid-Ask Spread? The Bid-Ask Spread in layman's terms is simply the area between where the bid price ends to where the ask price begins i.e from the highest bid to the lowest ask.

Also called the spread, it is given a numerical value through the following calculations.

_{Screenshot of STEEM/SBD market taken from my steem wallet, edited using Photogrid}

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

We know what it is. But what is it's importance in the market? The Bid-Ask Spread has one major importance and this is it's relationship with the liquidity of a market.

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NB

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The Bid-Ask Spread has a kind of inverse proportional relationship with liquidity as follows:

• The larger the spread, the lower the liquidity in the market.
• The smaller the spread, the higher the liquidity of the market.

Therefore, we use the Spread to know how readily we will be able to sell our goods or buy goods in any market.

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
Bid Price (BP)= $5
Ask Price (AP) = $5.20
a) Bid-Ask Spread = AP - BP
i e Bid-Ask Spread = $5.20 - $5
= $0.20
b) % Bid-Ask Spread = (Bid-Ask Spread/Ask Price) × 100
i.e % Bid-Ask Spread = ($0.20/$5.20) × 100
= 0.03846 × 100
= 3.85 %

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
Bid Price (BP)= $8.40
Ask Price (AP)= $8.80
a) Bid-Ask Spread = AP - BP
= $8.80 - $8.40
= $0.40
b) % Bid-Ask Spread = (Bid-Ask Spread/Ask Price) × 100
= ($0.40/$8.80) × 100
= 0.04545 × 100
= 4.55 %

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

The asset with the highest liquidity is crypto X because it's Bid-Ask Spread i.e $0.20 is less than that of crypto Y which is $0.40.

6. Explain Slippage.

Slippage is a phenomenon which occurs when a market order is executed at a price different from what was initially stated, due to the fluctuation in the prices between the time the order was given and time it was executed. The rate at which slippage occurs is higher in markets with a large Spread than in those with a smaller Spread.

7. Positive Slippage and Negative slippage with price illustrations for each

There two types of slippage namely; positive slippage and negatively slippage.
a) Positive Slippage: It occurs when the order was executed in a way that favours the trader. If the order was to buy, then a positive slippage will mean that the order was executed at a lower price than stated. If the order was to sell, then a positive slippage means that the order was executed at a higher price.

• Suppose a trader made an order to buy crypto for $50 and the trade is executed at $48, then the positive slippage here will be $50 - $48 = $2
• Suppose a trader made an order to sell crypto at $50 but the crypto was sold at $51.8, then the positive slippage here will be $51.8 - $50 = $1.8

b) Negative Slippage: It occurs when the order was executed in a way that does not favour the trader. For an order to buy, negative slippage will occurs when the order is executed at a higher price than stated. For an order to sell, negative slippage will occur when the order is executed at a lower price than intended.

• If an order was placed to buy crypto at $20, but was executed at $21.3, the negative slippage here will be $21.3 - $20 = $1.3
• If an order was placed to sell crypto at $20 but was rather sold at $19.1, the negative slippage here will be $20 - $19.1 = $0.9

Conclusion

• The Bid-Ask Spread is a very important feature to note in a market for traders who wish to buy or sell. It is also a determining factor of liquidity.
• Cryptocurrencies are very volatile having their prices rise and fall rapidly within seconds and minutes.
• The time frame between when an order is placed in a market and when it is executed gives room for the phenomenon known as slippage.
• Slippage could be favourable for the trader (positive slippage) or unfavourable for the trader (negative slippage).
• The Bid-Ask Spread gives an idea to the frequency of slippage in any given market.

Thank you for reading.
@rosita-nkefor

PS: All pictures unless stated otherwise are mine.