How do Spreads Work?

[Jetheat]

At times you see spreads becoming tighter and sometimes they spread apart.

What makes it contract and expand? What's happening with the buy/sell orders to make it do that?

How can you take advantage of this information?

JH

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[20kevin20]

You can study the following article from investopedia: https://www.investopedia.com/trading/basics-of-the-bid-ask-spread/, I think it covers your needed answers. Investopedia is a great resource for gaining knowledge about trading stuff. You can also follow top traders on TradingView, they usually give good answers to the Why? and When? questions regarding the way a market looks.

[ZaraCB]

Your question is not clear to me. So waiting answer from some high rank members. I left here some useful link for you..
1. https://www.stock-options-made-easy.com/buy-and-sell-orders.html
2. https://www.dummies.com/personal-finance/investing/stocks-trading/understanding-different-buy-and-sell-orders-when-managing-stocks/
3. https://www.investor.gov/introduction-investing/investing-basics/how-stock-markets-work/types-orders

[Jetheat]

I looked at the sites but how does a wide spread affect your trading decision and your trade?

What makes it unfavourable (if it is indeed unfavourable)?

JH

[OgNasty]

The spread is just the distance between what people will pay for something versus what they want to sell it for.  There are a million reasons why this could be large.  Some off the top of my head would be a low volume exchange (lots of buying/selling typically would mean lots of people meeting in the middle), exchanges that profit from the "moat" (distance between the buy/sell) for example Coinbase has a wide moat which acts as invisible fees for users and you'll likely never see the bid/ask touching.  It could also be caused by a volume spike, say someone buys up a lot of the asks or sells deep into the bids, leaving a large distance between the bids and asks that needs time to be filled in by new traders.  Maybe the exchange has high fees so market makers that profit from high volume low profit trades need a wider moat to make profitable trades.  I could name scenarios all day, but basically it isn't just one thing that can cause this.

[joniboini]

What makes it unfavourable (if it is indeed unfavourable)?

A huge spread can cause your trade to get riskier, especially if you're trying to scalp. It also means that your stop/target could get slower or longer to hit. Coins with huge spread are not suitable for day trading (unless the spread is temporary). Long or mid-term trading like days or weeks might still count them in but it's still not as good as those with little spread a.k.a high volume.

[Jetheat]

The spread is just the distance between what people will pay for something versus what they want to sell it for.  There are a million reasons why this could be large.  Some off the top of my head would be a low volume exchange (lots of buying/selling typically would mean lots of people meeting in the middle), exchanges that profit from the "moat" (distance between the buy/sell) for example Coinbase has a wide moat which acts as invisible fees for users and you'll likely never see the bid/ask touching.  It could also be caused by a volume spike, say someone buys up a lot of the asks or sells deep into the bids, leaving a large distance between the bids and asks that needs time to be filled in by new traders.  Maybe the exchange has high fees so market makers that profit from high volume low profit trades need a wider moat to make profitable trades.  I could name scenarios all day, but basically it isn't just one thing that can cause this.

I understand if there is low volume/liquidity, the spread would increase.
I understand large spreads can mean that exchanges profit by building in their fees (in the spread).
I understand that if someone consumes a shit load of sell orders or buy orders, it would create a temporary distance between the current price and the furthest consuming price, thus creating a spread.

I don't understand the part about market makers benefiting from wide spreads. Can you explain that a bit more?


JH

[CmVill]

Your question is not clear to me. So waiting answer from some high rank members. I left here some useful link for you..
1. https://www.stock-options-made-easy.com/buy-and-sell-orders.html
2. https://www.dummies.com/personal-finance/investing/stocks-trading/understanding-different-buy-and-sell-orders-when-managing-stocks/
3. https://www.investor.gov/introduction-investing/investing-basics/how-stock-markets-work/types-orders

Thanks for your timely help, I'll check through the links and their sections.

I am trying to understand about this too. With your guide, I hope to solve this 

Thanks for you help!

[Darker45]

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I don't understand the part about market makers benefiting from wide spreads. Can you explain that a bit more?

Let me attempt to clarify this a little for you in the simplest of terms, because, to be honest, we are both noobs actually.

As I understood this, a wider spread could actually mean a bigger profit. For example, if the bid (buy) price of BTC is at $6,000 and the ask (sell) price is $6,500, you could potentially make $500 in a single bid/ask or trade filled. That's $500 gain per BTC. If you are putting 10 BTC in there, that would be $5,000 for you. Compare it with a very narrow spread. Let's say, the bid is at $6,000 and the ask is at $6,100. There is only $100 as a potential profit per bid/ask.

This could help more: https://www.investopedia.com/terms/m/marketmakerspread.asp

For example, market maker MM in a stock – let’s call it Alpha – may show a bid and ask price of $10 / $10.05, which means that MM is willing to buy it at $10 and sell it at $10.05. The spread of 5 cents is its profit per share traded. If MM can trade 10,000 shares at the posted bid and ask, its profit from the spread would be $500.

[Jetheat]

If you buy at $6000 and the spread is $500, then you are in the hole by $500 immediately. So how can that benefit anyone?

[OgNasty]

If you buy at $6000 and the spread is $500, then you are in the hole by $500 immediately. So how can that benefit anyone?

Market makers benefit from a larger spread because they place both buy and sell orders at the same time. A larger spread in your scenario means they’re buying at $6,000 and selling at $6,500. That is a bigger profit than if they were buying at $6,200 and selling at $6,300.

[Jet Cash]

Historic note.

When the London stock exchange had Jobbers and Brokers, the spread was the jobbers profit ( sometimes called the Jobber's turn ), When a Jobber's book was long on a share, he might narrow the spread by reducing the sale price to balance his book. If he wanted to build his stock, then the might increase the sale price to encourage a broker to go to another jobber. Obviously the buying price could be varied as well as the sale price. These days, exchanges can assume some of the roles of the old stock jobbers.

[bladeofblood1]

really simple:

you buy in a certain price (ex. $5)

after a week it increased to $15

you get $10 if you sell at that exact price

tl:dr you make from the difference, not the FULL price.

[figmentofmyass]

If you buy at $6000 and the spread is $500, then you are in the hole by $500 immediately. So how can that benefit anyone?

Market makers benefit from a larger spread because they place both buy and sell orders at the same time. A larger spread in your scenario means they’re buying at $6,000 and selling at $6,500. That is a bigger profit than if they were buying at $6,200 and selling at $6,300.

a huge spread like that indicates a very illiquid market. market makers set very wide spreads in that situation because they need strong returns to hedge against market moves. if the market moves against them, they will bleed money because there is no liquidity to dump into.

this is why we see more robust market making on big markets like coinbase, with extremely small spreads, because it represents much lower risk.

[OgNasty]

If you buy at $6000 and the spread is $500, then you are in the hole by $500 immediately. So how can that benefit anyone?

Market makers benefit from a larger spread because they place both buy and sell orders at the same time. A larger spread in your scenario means they’re buying at $6,000 and selling at $6,500. That is a bigger profit than if they were buying at $6,200 and selling at $6,300.

a huge spread like that indicates a very illiquid market. market makers set very wide spreads in that situation because they need strong returns to hedge against market moves. if the market moves against them, they will bleed money because there is no liquidity to dump into.

this is why we see more robust market making on big markets like coinbase, with extremely small spreads, because it represents much lower risk.

Coinbase has the largest spread of any exchange I’ve used. I suspect it is because they act as the market maker and earn a hefty hidden fee from their users for doing so.

[terrate]

high spread that means exchange earn more.
And u need to decide ur starting /end point for your profit.

[OgNasty]

high spread that means exchange earn more.

That is only true if the exchange is acting as the market maker. Whoever is buying/selling across the spread are the ones that make the money. Coinbase is the only exchange I’m aware of that plays market maker under the guise of being an exchange.

[figmentofmyass]

a huge spread like that indicates a very illiquid market. market makers set very wide spreads in that situation because they need strong returns to hedge against market moves. if the market moves against them, they will bleed money because there is no liquidity to dump into.

this is why we see more robust market making on big markets like coinbase, with extremely small spreads, because it represents much lower risk.

Coinbase has the largest spread of any exchange I’ve used. I suspect it is because they act as the market maker and earn a hefty hidden fee from their users for doing so.

oh yeah, i mean coinbase pro: https://pro.coinbase.com/trade/BTC-USD

the spread is usually less than $1 (often $0.01) unless there is a lot of volatility happening.

on coinbase's regular site, they definitely act as market makers. they are fleecing the shit out of noobs and adding huge commissions on top.