bid/ask spread question

Discussion in 'Order Execution' started by earlyred, Dec 1, 2011.

  1. earlyred


    Hello ET’s

    I need some help on a few rookie questions regarding the Bid/Ask and the Spread. Lets suppose for argument sake that the current price in the S&P E-Mini is Bid at 1234.00, and the Ask/Offer at 1234.50, and the "Last" price at 1234.25

    Ambiguity aside, I understand that the "Last" trade is not the actual price of the S&P. The last trade is simply that, the last trade. In any case, the actual price for someone who wants to Buy is the Ask/Offer 1234.50 (In other words, they pay what is Asked at 1234.50 to open a position). The actual price for someone wishing to sell is the Bid 1234.00 (they pay to receive the Bid at 1234.00 to open a position).

    So, the current Bid is where "the market" (i.e. the exchange) is willing to Buy the S&P, and the current Ask is where "the market" (the exchange) is willing to Sell the S&P. But you and I, as retail guys and non-exchange members, I have to Buy at the Ask, and Sell at the Bid.

    Therefore, the "Last" price is virtually meaningless to my buying and selling activity, unless that price is at the Bid/Ask, because I must Buy at the Ask, and must Sell at the Bid. To my knowledge, the "Last" price is only available to exchange members and selective associates. My questions are these:

    1. Why is there a spread between the Bid and the Ask, and why isn't it single price available to anyone?
    2. Why does the spread exist if the spread has no inherent value, or is not available to any one?
    3. If the Spread is in fact exchange generated, can the "Spread" still vary from brokerage to brokerage?
    4. I have seen some DOM’s (Depth of Market) on ET, wherein there appears to be no Bid/Ask price. And there is only one single price where they can either Buy or Sell. And if the trader "clicks" at this price, they get that price. Do these traders still pay the Spread, or are they possibly renting exchange seats in order to transact at this single price, or is there some other thing going on?

  2. rmorse

    rmorse Sponsor

    First, understand that you can bid or offer at ANY price you want. If your a buyer on the bid, and a seller comes in, you can get an execution at that price. You don't have to take the offer unless you want an execution at the moment. The exception is the FX market. This is a interbank market that each bank shows there own bids and offers and don't have a responsibility to show your orders.

    1-The bids and offers you see are the current market. There can't just be one price for everyone. Who would take the other side all the time. Also, prices would then never change. It's an auction market, buyers and seller get together.

    2-The spread has great value. Shows the current market.

    3-The spread is not generated from the exchange. As I said, it represents the buyer and seller in the market place. You only have a trade when they agree on price. Your broker is only displaying the market at the exchange. With the exception of FX.

    4-I think I answered this with my other responses. The advantage of paying for a membership in an electronic futures exchange is lower cost. In the old days, there was an advantage of time and place. No longer.
  3. As in any "auction" marketplace, there are bidders and sellers. Trader "A" is willing to pay 1234, Trader "B" is willing to sell for 1234.50 (2 tick difference). Someone traded in the middle at 1234.25 somewhere. You can enter a bid at 1234.25, or take the offer at 1234.50, up to you. Meaning, you can improve the marketplace, thus being first for a nanosecond, in line.

    All this changes in a heartbeat. You might try listening to my friend, Ben Lichtenstein at - take a free trial, learn how this process works.

    My brother and I, and many of our traders, cannot trade anything well (stocks, etc.) without listening to Ben...seriously.

    You need to understand this stuff "cold" before ever attempting to buy or sell futures, or any instrument really.

    A very good questions...