Effective Spreads quantify the true transaction cost incurred by a market participant when executing a crypto asset trade. This metric is measured as twice the absolute difference between the actual transaction price and the prevailing mid-point of the bid-ask spread at the moment the order was placed.
Mechanism
Unlike the quoted spread, which merely reflects the instantaneous visible difference between the highest bid and lowest ask, the Effective Spread accounts for any price improvement or degradation experienced during execution. This includes the impact of slippage or price movement caused by the order itself, particularly for larger trade sizes.
Methodology
Analyzing Effective Spreads allows institutional traders to precisely evaluate the true cost of liquidity and the execution efficiency offered by various trading venues and liquidity providers. A lower effective spread indicates more efficient trade execution and reduced market impact, informing smart order routing decisions and counterparty selection within crypto trading strategies.
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