Bid-Ask Spread Impact refers to the financial effect that the difference between the highest bid price and the lowest ask price has on trade execution costs. In crypto markets, this impact is particularly relevant as wider spreads translate directly into higher transaction expenses for traders. It represents an implicit cost beyond explicit fees.
Mechanism
When a market order is executed, it consumes available liquidity at the prevailing bid or ask price. If the spread is wide, a buyer pays a higher ask, or a seller receives a lower bid, compared to the mid-price. For large orders, multiple levels of the order book may be traversed, exacerbating this cost.
Methodology
Strategies to mitigate bid-ask spread impact often involve using limit orders or algorithmic execution that seeks to trade within or near the spread. Traders evaluate liquidity across different venues to find tighter spreads and employ smart order routing to access the best available prices. Understanding this impact is central to optimizing overall trading performance.
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