Bid-Ask Spread

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Community Submission - Author: Vitor Mesk

The concept is known as the bid-ask spread because it is the gap between the lowest asking price (sell order) and the highest bid price (buy order).

Basically, the bid-ask spread may be formed in two different ways. First, it can be created by a broker (or trading intermediary) as a way to monetize for their service. Second, it can be created just by the differences between the limit orders placed by traders on an open market.

In traditional markets, the bid-ask spread is a common way of monetizing from trading activities. For example, many brokers and trading platforms offer commission-free services that only monetize by making use of the bid-ask spread. This is possible because they are the ones that provide liquidity to the market, meaning that sellers and buyers need to accept the price defined by the broker. Otherwise, they cannot participate in that market. In other words, they set the difference between selling and buying prices and make profits from it, essentially buying at a lower price from sellers and selling at a higher price to buyers.

With cryptocurrencies, most trading activities occur on cryptocurrency exchanges, where buying and selling orders are directly placed by the users (traders) into the order book. In this case, the exchange doesn’t monetize from the spread, but only from the trading fees.

Usually, high volume markets have a lower spread because of their higher liquidity (more competition among buyers and sellers). On the other hand, markets that are not liquid enough and present low trading volume tend to have a more significant spread.

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