Quote Spread Impact refers to the change in the bid-ask spread of a financial instrument resulting from market activity, particularly large orders or aggressive trading. It quantifies how trading actions influence market liquidity and transaction costs for participants.
Mechanism
When significant orders are placed, they can consume available liquidity at existing price levels, causing the spread to widen as market makers adjust their quotes or withdraw orders. This dynamic reflects the temporary imbalance between supply and demand within the order book.
Methodology
In crypto Request for Quote (RFQ) and institutional options trading, understanding quote spread impact is crucial for optimizing execution strategies. Traders employ algorithms to minimize this impact by routing orders intelligently across multiple liquidity venues, using passive order placement, or negotiating larger blocks over-the-counter to preserve tighter spreads and reduce transaction expenses.
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