Steemit Crypto Academy [Beginners' Level] | Season 4 Week 1 | The Bid-Ask Spread by professor @awesononso by @jollybake

Hello steemit crypto academy and environ,how are you doing today.
I'm delighted to partake in this new season and I want to thank professor @awesononso for the effort he puts in to bring us to grasp the concept of bid-ask spread.

Properly explain the Bid-Ask Spread.

Before I explain what bid-ask spread is I'll like to illustrate it's meaning base on my understanding.

For instance,I need to purchase a handbag and I want to the market to get it.

At the market, the seller told me the ask price as $10 but I bid $9 for the handbag. This means that the highest price that I can pay for the handbag (bid) $9 while the lowest amount the trader is willing to sell (Ask) is $10

It follows that, the difference ($1) between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept is called Bid-Ask Spread.

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

Liquidity is how easy a commodity is traded in a market.

The availability of commodity or asset to be traded in a market is supply while the willingness of people to accept and purchase the asset is demand. When there is a balance between these two factors in a market then it's liquid.
The Bid-Ask Spread is important because it determine liquidity.

It follows that if there is an equilibrium in the demand and supply of an asset in the market,then there is liquidity and the only way to determine that in a market is through bid-ask spread.

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
a) The Bid Price = $5
The Ask Price = $5.20
Bid-Ask Spread = Ask price - Bid price
= $5.20 - $5 = $0.2

Therefore, bid-ask spread = $0.2

b) %Spread = (Spread/Ask price) x 100
= (0.2/5.20) x 100
= (0.0385)x 100
= 3.8%.

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

a) The Bid Price = $8.40
The Ask Price = $8.80
Bid-Ask Spread = Ask price - Bid price
= $8.80 - $8.40= $0.4

Therefore, bid-ask spread = $0.4

b) %Spread = (Spread/Ask price) x 100
= (0.4/8.80) x 100
= (0.0455)x 100
= 4.5%.

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

From the solution above, the crypto X has a spread of $0.2 while crypto Y spread is $0.4.
Which means that crypto Y has a higher spread when compared to crypto X. It also mean that crypto X with $0.2 has higher liquidity than crypto Y with $0.4.

Explain Slippage

Slippage occurs when a trade order is filled at a price different from the requested price. It also means when the market price and the transaction price is different. It can happen as a result of time.

For instance,you've been to the market and have seen the market price, as well as loaded your application for purchase at a certain price but before the final conclusion of the purchase the price has changed to a higher or lower price from the original market price

Slippage can also occur as a result of order size. For instance I need to buy 10 shares for $10,that is $1 for each share. And then the first ask price is at $1 but with 5 shares to sell and the the second ask price is at $2 with 3 shares to sell and the third ask price is $3 with 10shares to sell.
Remember, the original plan is to get 10 shares for $10 but because of the availability of shares that is supply. I needed up paying $17 for shares I planned $10 for. This is as a result of Slippage in the market.

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

Positive Slippage

Mr Okafor placed an order at $55.68 but at the time the deal is to be closed he realized that there is a shift in the market price which make him to finalize the deal at $55.60.

It means that when the market price is filled at a price lower than the intended it is a positive slippage which is also a more favourable price for Mr. Okafor.

Therefore, positive slippage would be; $55.68 - $55.60 = $0.08.

Negative Slippage

A negative slippage is the opposite of positive slippage. Here Mr Okafor fills his intended order $55.68 for a price that is higher than what he bergained and unfavorable for him too .

Remember, Mr Okafor place order for shares at $55.68.
instead the trade was executed at $55.70, the negative slippage would be;
$55.70 - $55.68 = $0.02

Conclusion

Bid-ask spread determine the liquidity of the market.

Slippage occurs when there is a shift or change of price after the order is concluded.

Cc: professor @awesononso