Bid/Ask Spread
- Created by: Nimnomrata.XOXO
- Created on: 10-11-20 19:12
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- Bid - Ask Spread
- Elements of Bid/Ask Spread
- Order processing Cost
- Cover the cost of running the business
- Inventory Cost
- Cost of having to keep overall inventory under control
- erodes profit
- market maker cannot refuse a trade; may find themselves increasingly long on a security
- market makers deal with the positioning of their prices to attract offsetting orders
- Information Costs
- Cost of trading with someone with more knowledge on FV
- Highly liquid market
- required to ensure ideal exit point to make profit
- Friction between demand and supply
- To create a spread
- Order processing Cost
- Liquidity providing traders make profit by buying low; selling high
- Bid Price
- Price at which the market maker will buy the asset
- represents demand
- Ask Price
- Price at which the market maker will sell the asset
- represents supply
- difference between the ask and bid price
- De Facto measure of market liquidity
- De facto - law and government
- Different assets will have different bid-ask spread
- Due to the difference in liquidity
- Currency one of the world's most liquid asset
- smallest bid/ask spread
- reflect market makers perceived risk of the trade
- Elements of Bid/Ask Spread
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