Bid/Ask Spread

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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
    • 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


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