Making the Spread

Discussion in 'Strategy Development' started by Rchemo, Dec 12, 2005.

  1. Rchemo

    Rchemo

    Being inexperienced, I have been reading alot of books to help my trading. Most of them refer to a bid-ask spread, and techniques on how to make a quick in and out. However, most of these books were written before decimalization, and refer to "teenies" or 1/16's, perhaps 1/8's. Well, my problem is that when I watch a list of stocks throughout the day, the spread is usually a penny or not even there. Am I missing something?
    Also, I noticed that at the end of the day, the close doesn't change, but the bids and offers do. By the time the smoke clears, most securities end up with anywhere between .25 and $1.5 spread. Now, the specialist ( or MM) needs to make money too, so this seemed more like it to me. So is there a hidden spread that still exists, or does the specialist or MM have ways to buy/sell market orders before others?

    Thanks

    Todd
     
  2. If you are reading books that talk about the spread and "making the spread" is a fundamental part of the strategies they are discussing then I would recommend you only read books published after the switch to decimalization.

    Ignore the bid/ask after the market has closed - they are meaningless. There is no hidden spread - what you see is what there is.

    Hope that helps.
     
  3. Rchemo

    Rchemo

    Yes it does help...So what has happened to the specialists spread? I assume he must still make the market fair and orderly, and I doubt he doesn't make as much as he used to. Is he forced to do his job now for pennies per share and volume makes up for it?

    Todd
     
  4. FredBloggs

    FredBloggs Guest

    'he' is now an 'it' - a machine in most cases.

    this is one reason why 'he' lost his job to 'it' - because 'it' is cheaper and faster to employ (and doesnt need a year end bonus, unlikely to get head hunted etc :) )

    he cant trade around a penny as fast as it can either.

    this may be of interest if market microstructure is of interest to you:

    http://econ.ucsc.edu/faculty/dan/econ234/Market_Microstructure.pdf
     
  5. Rchemo

    Rchemo

    So I am reading outdated material then...Thanks for the info, it looks like just what I was looking for.

    Todd