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<center><div class = "phishy"> Introduction </div></center>
Helo to you all, I'm happy to take on the homework post profeso @awesononso on **Bid-Ask-Spread** and my entry go thus.
# <center> Properly explain the Bid-Ask Spread.</center>
Bid-Ask-Spread is simply the differences between the instant purchase of pair of currencies or stocks, contracts etc and the prices noted for an immediate sale. In other words, Bid-Ask-Spread is the difference between the lowest price that a seller wishes to accept and the highest price the buyer wishes to pay for the asset. There is fair value at the midpoint of the spread referring to the price that can be suitable to both the Buyer and seller.
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It's very simple calculating **Bid-Ask-Spread** as we can calculate the **Spread** from the formula below as ๐
**Spread = ask price - bid price**
We could also calculate it as
**%spread = [spread/ask price] ร 100**
# <center>Why is the Bid-Ask Spread important in a market?</center>
Bid-Ask Spread is very important in a market in the sense that when ever a trader trades, a Stock price/volume screen always show the trader a **bid** price showing the best price other parties are willing to buy the stock and an **ask**price showing the best price at which other parties are willing to sell the stock hence showing the differences between the bid and ask because the the Bid-Ask-Spread indicates the extent at which the ask price on the screen is greater than the bid price
The Bid-Ask-Spread also helps in determining the liquidity of a commodity in the market of traders
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# <center> If Crypto X has a bid price of $5 and an ask price of $5.20.</center>
## a) let's calculate the Bid-Ask-Spread for Crypto X
Bid price = $5
Ask price = $5.20
Hence Bid-Ask-Spread = ask price - bid price
= $5.20 - $5 = $0.20
## b) let's calculate Bid-Ask-Spread in percentage
We will use this formula below ๐
**%spread = [spread/ask price] ร 100**
Spread = $0.20
Ask price = $5.20
Hence Bid-Ask-Spread In % is
**[0.20 รท 5.20] ร 100**
0.038 ร 100 = 3.8
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# <center> If Crypto Y has a bid price of $8.40 and an ask price of $8.80. </center>
## a) let's Calculate the Bid-Ask spread for Crypto Y
Bid price = $8.40
Ask price = $8.80
Hence Bid-Ask-Spread = ask price - bid price
= $8.40 - $8.80 = $0.4
## b) let's calculate Bid-Ask-Spread in percentage
We will use this formula below ๐
**%spread = [spread/ask price] ร 100**
Spread = $0.4
Ask price = $8.80
Hence Bid-Ask-Spread In % is
**[0.4 รท 8.80] ร 100**
0.0454 ร 100 = 4.54
# <center> In one statement, which of the assets above has the higher liquidity and why? </center>
The Crypto of Y is greater than the Crypto of X ( 0.4 > 0.2) hence indicating that that **Crypto liquidity is greater than that Crypto X liquidity**
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# <center> Explain Slippage.</center>
When we talk of Slippage we refer to the difference between the price at which we can execute a trade and the expected Trade price. We can also futher say that slippage is the situation at which the Market traders recieve different trades in carrying of prices and this occurs when ever a Bid-Ask-Spread changes between the the time a market order is asking and the exchange maker time executes the order and this usually happens in all venues of the market including currencies, bonds, futures etc.
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A good example of Slippage is let's say a bid/ask price of a commodity is $100/$100.50 on a broker interface and the market order for 100 share is kept, this means that the intention of the market order will be filled at $100.50 but the micro transactions per seconds will be done by computerizing the Bid-Ask-Spread to $100.4/100.57 before filling the order. So the order will then be filled at exactly $100.57 by incurring a $0.04 per share or 100 share negative slippage per $4
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# <center> Explaining the Positive Slippage and the Negative slippage with price illustrations for each. </center>
## A) positive Slippage with price illustrations
A positive Slippage is when ever and order is filled at a higher suitable price and the **bid** always increases in a shorter trade or the **ask** always decreases in a very long trade.
A good example is when if a trader trades for Crypto Z so as to buy it at let's say $50 and Instead the trade is executed at let's say $47. Then the we can now calculate the positive Slippage as
$50 - $47 = $3
If the trader trades was also placed for the Crypto Z so as to sell it at let's say $60 and Instead the trade was executed at let's say $62, we then calculate the positive Slippage as
$62 - $60 = $2
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## A) Negative Slippage with price illustrations
A Negative Slippage is when ever an order is filled at a lesser suitable prices and the **bid** always decreases in a shorter trader or the **ask** always increases in a longer trade
A good example is when if a trader trades for Crypto Y so as to buy it at let's say $150 and Instead the trade is executed at let's say $150.50 . Then the we can now calculate the negative Slippage as
$150.50 - $100 = $0.50
If the trader trades was also placed for the Crypto Y so as to sell it at let's say $140 and Instead the trade was executed at let's say $140.3, we then calculate the negative Slippage as
$140.3 - $140 = $0.3
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<center><div class = "phishy"> Conclusion </div></center>
After knowing the differences between positive and negative Slippage, we can say that the market traders can be able to secure themselves from the slippage by always putting limits to orders and also avoiding market orders
Thanks so much profesor @awesononso for this beautiful lessons for I'm fully digested now
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