Hello Steemians, it's a pleasure and a privilege to be here at the start of a new season, and I hope to learn from such great minds. This week's lesson by prof @awesononso on Bid-Ask Spread, explaining the concept and importance of Spread. I will be doing the Homework Task from the lesson. ![0001.jpg](https://cdn.steemitimages.com/DQmZyp1JU6nRDukqAk2GGnHw3AFycp5Ga2wX3NE9HutQ4Ts/0001.jpg) ![image(1).png](https://cdn.steemitimages.com/DQmYypBEzJTEsRik4RNK21iiBgy4yBNk4J4auqi6XnkXh35/image(1).png) ### 1. Properly explain the Bid-Ask Spread. #### Bid-Ask Spread In all forms of trading, there is the price the buyer is willing to buy a product, and there is the price the seller is willing to sell. This is no different in financial or crypto trading, and the difference between these two prices is called the **Spread**. ![photo_2021-09-11_03-58-00.jpg](https://cdn.steemitimages.com/DQmVLZPwVnJ5s5bTC4vMqAgrxM4xb2R9AneDEpwribWDRBq/photo_2021-09-11_03-58-00.jpg)_{screenshot taken from tradingview} The Bid price is the **highest price** a trader will pay for an asset, and the Ask price is the **lowest price** a trader is willing to sell an asset. The difference between the Bid price and the Ask price is called the Bid-Ask Spread or is usually called Spread. The Bid-Ask Spread is mathematically represented as **Bid-Ask Spread = Ask price - Bid price.** ![image(1).png](https://cdn.steemitimages.com/DQmYypBEzJTEsRik4RNK21iiBgy4yBNk4J4auqi6XnkXh35/image(1).png) ### 2. Why is the Bid-Ask Spread important in a market? Bid-Ask spread is essential in the market as it shows the **liquidity of the market**. If the Spread of a market is **tight**, it indicates that buying and selling demand is of equal proportion. A wide Bid-Ask spread indicates disparity in the supply and demand of the asset. A wide Spread shows that fewer traders are willing to buy or sell the asset leading to a low liquidity market. Generally, a bid-ask spread shows the willingness of traders to buy or sell an asset. A tight Spread shows equal supply and demand, while a wide Spread shows inequality in the supply and demand. ![image(1).png](https://cdn.steemitimages.com/DQmYypBEzJTEsRik4RNK21iiBgy4yBNk4J4auqi6XnkXh35/image(1).png) ### 3. 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. ##### 1. Calculate the Bid-Ask Price Bid Price of Crypto X = $5 Ask Price of Crypto X = $5.20 **Bid-Ask Spread = Ask Price - Bid Price** Bid-Ask Spread = $5.20 - $5 **Crypto Bid-Ask Spread = $0.20** ##### 2. Calculate the Bid-Ask Spread in Percentage **Spread Percentage % = (Spread/Ask Price) x 100** Spread Percentage % = (0.20/5.20) x 100 **Crypto X Spread Percentage % = 3.85 %** ![image(1).png](https://cdn.steemitimages.com/DQmYypBEzJTEsRik4RNK21iiBgy4yBNk4J4auqi6XnkXh35/image(1).png) ### 4. 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. ##### 1. Calculate the Bid-Ask Price Bid Price of Crypto Y = $8.40 Ask Price of Crypto Y = $8.80 **Bid-Ask Spread = Ask Price - Bid Price** Bid-Ask Spread = $8.80 - $8.40 **Crypto Bid-Ask Spread = $0.40** ##### 2. Calculate the Bid-Ask Spread in Percentage **Spread Percentage % = (Spread/Ask Price) x 100** Spread Percentage % = (0.40/8.80) x 100 **Crypto Y Spread Percentage % = 4.55 %** ![image(1).png](https://cdn.steemitimages.com/DQmYypBEzJTEsRik4RNK21iiBgy4yBNk4J4auqi6XnkXh35/image(1).png) ### 5. In one statement, which of the assets above has the higher liquidity and why? The asset with the higher liquidity is the **Crypto X** asset with Spread at **$0.2**and spread percentage at **3.85%**; this is because it has a **tighter Spread and lower spread percentage** when compared to the Crypto Y asset. ![image(1).png](https://cdn.steemitimages.com/DQmYypBEzJTEsRik4RNK21iiBgy4yBNk4J4auqi6XnkXh35/image(1).png) ### 6. Explain Slippage. #### Spillage In trading, traders place a market order to buy or sell an asset at a particular price. Sometimes due to market volatility, the order is entered at a different price; when this happens, it is called **Spillage**. High volatility in the market can cause Spillage as the price move quickly, and the set market order is placed at a different price. Spillage can also be caused due to low liquidity in a market, which makes matching orders difficult as there is a disparity in demand and supply. Slippage is given as the difference between the placed market order price for an asset and the price it is executed. ![image(1).png](https://cdn.steemitimages.com/DQmYypBEzJTEsRik4RNK21iiBgy4yBNk4J4auqi6XnkXh35/image(1).png) ### 7. Explain Positive Slippage and Negative slippage with price illustrations for each. #### Positive Spillage Positive Spillage is a type of Spillage that ** favors** the trader as it gives more profit to the trader. For instance, a trader willing to buy an asset at a price and the Spillage causes the asset to be purchased at a lower price, or a trader willing to sell and the Spillage causes the asset to be sold at a higher price than expected. - **Price Illustrations** **Trader A** places a market order to **Sell** an asset for **$100** and Spillage occurs in the market, and the asset was sold at **$101.50**. In this case, a positive spillage has occurred as Trader A has made a profit of **$101.50 - $100 = $1.50** from the Spillage. #### Negative Spillage Negative Spillage is a type of Spillage that is **not favorable** to the trader as it brings about a loss to the trader. For instance, a trader willing to buy an asset at a price and the Spillage causes the asset to be purchased at a higher price, or a trader willing to sell and the Spillage causes the asset to be sold at a lower price than expected. - **Price Illustrations** **Trader B** places a market order to **Buy** an asset for **$100**, and Spillage occurs in the market, and the asset was bought at **$101.50**. In this case, a negative spillage has occurred as Trader B has incurred a loss of **$101.50 - $100 = $1.50** from the Spillage. ![image(1).png](https://cdn.steemitimages.com/DQmYypBEzJTEsRik4RNK21iiBgy4yBNk4J4auqi6XnkXh35/image(1).png) ### Conclusion Spread in financial trading is essential to pay attention to as it indicates the liquidity of an asset then, as trading in a low liquidity market is not advisable. Spillage occurs in a highly volatile market or low liquidity market. Spillage is the phenomenon where trade is executed at a price different from the price set by the trader. Spillage can be positive or negative as it can favor the trader or against the trader. Thanks, prof @awesononso.