not saying i won't still play, but..... if you had a dent in your car, you could still drive it and think about fixing it at the same time.
why do we need spreads?
- Thread starter Gordon Gekko
- Start date
A spread will ALWAYS exist in any financial market because there is a fundamental gap between buyers and sellers. If a buyer and a seller wanted to trade at one price then that trade would already be done, thus leaving both of them out of the market. The buyers and sellers that don't agree on one price are the ones who set a spread.
With regard to the ES, the 0.25 cent min spread is just an arbritary number, but even if there was no preset limit, there would still be some smaller difference between the bids and the offers.
The one price both buyer and seller agree upon = a TRADE.
The buyers and sellers at the same price cancel each other out, leaving a spread between the next highest bidder and the next lowest seller. The spread is inherent to any market; how wide this spread should be is another story.
The buyers and sellers at the same price cancel each other out, leaving a spread between the next highest bidder and the next lowest seller. The spread is inherent to any market; how wide this spread should be is another story.
Actually, you probably do have a bid and an ask for that baseball card. Is there a price you would be willing to sell your card for right now? $10? $100? $1m? Well, that's your current asking price.
There is probably also a price you would be willing to buy a second, identical card for. $5? $0.50? $.01? Well, that's your contemporaneous bid price.
Lots of other people probably have bid and ask prices also. Let's poll lots of people and where there are people with ask prices less than other peoples bid prices, let's help them make the trade (and charge a little "fee"!). And then when we can't execute any more trades, we'll post the highest remaining bid and lowest remaining ask price so people can get an idea of the going rate for the card. We'll give ourselves a fancy name like "Gordon and Aaron's Card Exchange" (GACE).
The difference between the best bid and the best ask on GACE is the spread. Besides basebasll cards, we could do the same thing with forward contracts on wheat to help out the farmers.
Do you see where I'm going?
Htrader - That was a very clear answer to Gordon's question.
Out of curiosity, does anyone know why GLOBEX sets a minimum spreads?
Out of curiosity, does anyone know why GLOBEX sets a minimum spreads?
Gordon -
The reason there isn't just one price and why there's a spread is because the market isn't the grocery store and you're not just buying tomatoes
It's an auction - actually it's more like a Moroccan bazaar with everyone haggling over the prices for all the different merchandise.
You offer your baseball card for sale for $100, somebody offers you $25, another guys offers $50, you might drop your price to $95, someone offers $60, ...
There's always an implicit spread when people are haggling over the price of something trying to determine at what price they're actually willing to consumate a deal - how big the spread is and where prices go during the haggling depends on normal supply and demand forces.
Something else to consider is if there were no specialists or MMs at all, there also wouldn't be a market at all in many stocks. For the most liquid stocks you've already got small spreads, for less liquid stocks you get larger spreads - that's natural.
Take the stock you noted (BBA), the spread was where it was because there wasn't anyone willing to step up and bid or ask at prices in between at that time. Check the daily volume (36,800 shares) - that's pretty illiquid, so of course you're not going to have one penny spreads.
You might not even have a reliable market in the stock if it wasn't for the specialist since what trades that do occur during the day probably have no one other than the specialist to be the other side at the time.
And why is there a 25 cent spread on the ES? Not a big mystery - it's because it only trades in increments of 25 cents - so that's the minimum spread it can have. All futures contracts have a specified tick size.
Since that's how it's specified right now, you just deal with it instead of worrying about it.
The reason there isn't just one price and why there's a spread is because the market isn't the grocery store and you're not just buying tomatoes
It's an auction - actually it's more like a Moroccan bazaar with everyone haggling over the prices for all the different merchandise.
You offer your baseball card for sale for $100, somebody offers you $25, another guys offers $50, you might drop your price to $95, someone offers $60, ...
There's always an implicit spread when people are haggling over the price of something trying to determine at what price they're actually willing to consumate a deal - how big the spread is and where prices go during the haggling depends on normal supply and demand forces.
Something else to consider is if there were no specialists or MMs at all, there also wouldn't be a market at all in many stocks. For the most liquid stocks you've already got small spreads, for less liquid stocks you get larger spreads - that's natural.
Take the stock you noted (BBA), the spread was where it was because there wasn't anyone willing to step up and bid or ask at prices in between at that time. Check the daily volume (36,800 shares) - that's pretty illiquid, so of course you're not going to have one penny spreads.
You might not even have a reliable market in the stock if it wasn't for the specialist since what trades that do occur during the day probably have no one other than the specialist to be the other side at the time.
And why is there a 25 cent spread on the ES? Not a big mystery - it's because it only trades in increments of 25 cents - so that's the minimum spread it can have. All futures contracts have a specified tick size.
Since that's how it's specified right now, you just deal with it instead of worrying about it.
Good point.
Think of it in terms of shopping in a supermarket.
Do you go in expecting to pay a set price for a gallon of milk?
If you see 2 different brands of milk, but one is .15 cheaper, would you buy the more expensive brand? Why on earth would 2 identical products ever be a different price?
Its the same with any product, the sellers (and buyers) often disagree on what price is in their best interests...
Sometimes, it's beyond that. Due to expenses, overhead, etc, 2 companies could make the same amount of money on identical products priced differently.
Everything has a spread, because we're not all robots.
Do you go in expecting to pay a set price for a gallon of milk?
If you see 2 different brands of milk, but one is .15 cheaper, would you buy the more expensive brand? Why on earth would 2 identical products ever be a different price?
Its the same with any product, the sellers (and buyers) often disagree on what price is in their best interests...
Sometimes, it's beyond that. Due to expenses, overhead, etc, 2 companies could make the same amount of money on identical products priced differently.
Everything has a spread, because we're not all robots.