Bid Ask Spread
The bid-ask spread is the difference between the lowest price requested for an asset and the highest bid one.
Assets with more liquidity, such as bitcoin, have a narrower bid-ask spread than assets with less liquidity and a small trading volume.
A Few Words About Bid-Ask Spread
When buying or selling an asset, for example, on a cryptocurrency exchange, you need to remember about the relationship between market prices and the bid-ask spread. It is also important to take into account the trading volume, the types of orders used, the degree of market liquidity, and the prevailing conditions, which may prevent a trader from making a deal at the desired price. Both the buyer and the seller want to get the best price, and this helps to create a bid-ask spread. There is also a possibility of slippage; it all depends on the amount of the asset and its volatility.
More Information About a Bid Ask Spread
As we have seen above, the bid-ask spread is the difference between the highest bid price value and its lowest value, respectively, which is offered by the order book. On conventional trading platforms, the bid-ask spread is very often formed by a market maker or broker-provider of liquidity, while at the same time, in the cryptocurrency markets the bid-ask spread is the difference between a limit order from a buyer and a seller. If a trader wants to buy immediately at the market price, he will need to accept a high ask price that is beneficial to the seller. In the context of an instant sale, the trader accepts the lowest bid price of the buyer. Assets with a higher degree of liquidity have a lower bid-ask spread, which means that both the buyer and the seller can have the opportunity to execute their order without significant transformations in the asset price.
A Few Words About Market Makers and the Bid-Ask Spread
Low-liquidity markets can make you wait a very long time for your order to be executed (hours, days). Not every market’s liquidity depends solely on traders. Traditional financial markets, where brokers and market makers provide liquidity in exchange for arbitrage profits, operate differently. A market maker can maximize his profit by simultaneously buying and selling an asset.
This is how the bid-ask spread is used — bought at a low price, sold at a high price, and so on over and over again. Even a modest bid-ask spread makes it appropriate to carry out at one-time substantial gains if you trade during the day. Due to this activity of market makers, highly demanded assets have a minor bid-ask spread.
Percentage of Bid Ask Spread
It is necessary to calculate the percentage of the bid-ask spread, so that, if necessary, it can be compared for different cryptocurrencies or assets.
The calculation formula is as follows:
Take BIFI as an example. Let’s say the ask price is $910 and the bid price is $905, the difference results in a bid-ask spread of $5, which must be divided by $910 and times 100, and we obtain our percentage spread of about 0.55.