Cryptoacademy season 4 week 1- Homework post for @awesononso: The Bid-Ask Spread

1.) The Bid-Ask Spread.
To properly understand what the Bid-Ask Spread is, one must understand what Bid and Ask mean.

BID

The Bid is simply the best available price at a given time at which the buyer is willing to buy a certain commodity in the market. When dealing with a broker, the Bid is the price at which you(the trader) is willing to sell a commodity as the broker becomes the buyer in this in scenario.

ASK

The Ask is simply the best available price at which the seller is willing to sell a commodity at a given point in time. When dealing with a broker, the Ask is the price at which the trader is willing to buy since the broker becomes the seller in this instance.
Since this is all cleared up, let us move to the main question.

The Bid-Ask Spread

The Bid-Ask Spread or Spread is simply the positive difference between the Bid and Ask prices of a commodity which is being made through the effect of the forces of demand and supply on the bid and ask prices of the commodity.
The mathematical representation will be:
Spread= Ask price-Bid Price.

2.) Significance of the Bid-Ask Spread.
The spread in the any market helps in determining and indicating how much of a commodity and how quickly it is being bought or sold in the market. This is called liquidity. A small spread would indicate should I say a form of equity or agreement in the market between buyers and sellers meaning there is a high liquidity in the marketing of the commodity. Meanwhile, a larger spread indicates the opposite (disagreement between the traders) and shows low level of liquidity.

3.)If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
Solution:
Spread=Ask price-Bid price
Spread=$5.20-$5.00
Spread=$0.20
b.) Calculate the Bid-Ask spread in percentage.
%Spread=(Spread/Ask price)×100
%Spread=(0.20/5.20)×100
%Spread=0.385×100
%Spread=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.
Spread=Ask price-Bid price
Spread=$8.80-$8.40
Spread=$0.40
b.) Calculate the Bid-Ask spread in percentage.
%Spread=(Spread/Ask price)×100
%Spread=(0.40/8.80)×100
%Spread=0.0455×100
%Spread=4.55%

5.)In one statement, which of the assets above has the higher liquidity and why?
From our observation of questions 3&4, we can conclude that crypto X has the higher liquidity. Why? As I said in question 2, the smaller the spread, the higher the volume traded and the higher the liquidity.

6.) Slippage
A Slippage is simply a scenario by which an order is filled at the different price from the original price intended by a trader due to the quick and volatile movement of the market involved.

7.) Types of Slippage
There are two types of Slippage namely;

• Positive slippage
• Negative slippage

Positive Slippage

This is a kind of slippage that favours the trader. It occurs either when the order is filled at a lower price when bought or when the order is filled at a higher price when sold.
E.g
Let's say one wanted to trade steem dollars and intended to go long when the price was at $8.60 but when the order is placed, he notices that the order was filled at $8.57. The positive slippage will be
$8.60-$8.57=$0.03.

Negative Slippage

This is simply the exact opposite of the positive slippage. It doesn't favour a trader as the order is filled either at a price higher than the intended price when bought or at a price lower than the intended price when sold.
Eg
Assuming someone intended to sell his steem dollars at $8.60 but when the order is placed, he notices that it was filled at $8.59. The negative slippage will be
$8.60-$8.59=$0.01.

Conclusion

The Bid-Ask Spread is simply the mathematical difference between Ask price and the Bid price of a commodity at a particular time. It is used to determine liquidity in the market as a small spread means high liquidity and vice versa.
Wonderful topic from professor @awesononso. A good way to kick off a season hopefully better than the last four everyone involved.