Bid-Ask Spread and Slippage

Table of contents

   1. What is Bid-ask spread?
   2. How bid-ask spread work?
   3. The importance of liquidity in platforms
   4. Depth charts and Bid-ask spread percentage
   5. When does slippage occur?

One of the mistakes that beginners make is paying attention to price when they want to trade but there are other important factors to consider which are trading volume, market liquidity and order types.

What is Bid-ask spread?
is the difference between the lowest asking price for an asset and the highest bid price. Liquid assets like Bitcoin have less spread than assets with lower liquidity and trading volume
If there is not enough liquidity to complete your order or the market is volatile and therefore the trade may settle at a different average price than what was initially required and then what is known as slippage occurs.

The problem is clearly visible with low-liquidity assets, so trying to break your order into smaller parts will give better results.

How bid-ask spread work?

There is constant negotiation between buyers and sellers that leads to a spread between the two sides so that there is the highest and lowest price in the order book.
If you want to make an instant purchase at the market price, you need to accept the lowest asking price from the seller. If you want to make an instant sale, you will get the highest bid price from the buyer.

The importance of liquidity in platforms

If you try to trade in low-liquidity markets, you may find yourself waiting for hours or even days for another trader to match your order.

Depth charts and Bid-ask spread percentage

The [Depth] option shows a graphical representation of an asset's order book. You can see the quantity and price of bids in green, along with the quantity and price of asks in red. The gap between these two areas is the bid-ask spread

The calculation is simple:

Code:

(Ask Price - Bid Price)/Ask Price x 100 = BidAsk Spread Percentage

When does slippage occur?

It occurs in markets with high volatility or low liquidity. When a market order is created, the exchange automatically matches the purchase or sale to limit orders in the order book. The order book will match you to the best price, but you will start climbing higher in the order chain if there is insufficient volume for the price you want. This process causes the market to fill your order at different, unexpected prices.

But not all slippages mean a loss. Positive slippage can occur if the price goes down while you place a buy order or increases if you place a sell order. Although it is uncommon, positive slippage may occur in some highly volatile markets.

Minimizing negative slippage:

break your order down into smaller blocks
If you're using a decentralized exchange, don't forget to factor in transaction fees
Use limit orders

Sources

Code:

https://academy.binance.com/en/articles/bid-ask-spread-and-slippage-explained
https://learn.bybit.com/trading/what-is-bid-ask-spread-and-slippage/
https://www.investopedia.com/terms/s/slippage.asp
https://medium.com/@silverstonksteam/bid-ask-spread-and-slippage-explained-4ac0e5f445b4
https://www.cryptohopper.com/blog/4538-a-deep-dive-into-bid-ask-spread-and-slippage