Price vs Spread - academic Q

Discussion in 'Order Execution' started by gerund, Mar 19, 2004.

  1. gerund


    Is the following relationship correct?:

    Typically, a higher priced stock has more liquidity than a lower priced stock. Given this increased liquidity, the spread on higher priced stock in usually narrower.

    I would like to learn the relatinoship between avg share price and average spread.
  2. Lucrum


    The average daily volume and/or the average number of trades probably effects liquidity or the depth of a market more than the share price. Just for an example look at BRK.A
    it's about as expensive as a stock gets but I think a typical spread between bid/ask is $200.
  3. The assumption is invalid. Take a look at some of the stocks under $5 that trade volume.

    You might be able to make a case that the spread as a % of the stock price is smaller for liquid high priced stocks.
  4. genejef


    Hi, gerund

    Your idea is 100% wrong.
    It is important :
    -if the market has been in a bull-move or bear-move
    -the market-makers' perceived value of the market
    Example. If the market has been in a bull-move and you place a buy order into a rising market, you may receive what seems to be a good price from the floor.
    Why? The market makers decided to start swiching positions, taking a bearish or negative view of the market, because their books have started to show large sell order to dispose of. Their perceived value of the market may be lower than your because they expect prices to fall or at best go sideways. Such action, repeated many times across the floor, will tend to keep the spread of the day narrow, by limiting the upper end of the price spread, because they are not only giving you what appears to be a good price, but also every other buyer.
    If the market maker has a bullish view, because he does not have
    large sell orders on his books, he will mark up the price on your buy order, giving what appear to be a poor price. This repeated makes the spread wider as the price is constantly marked up during the day.
    If you know how to "read" the spread, volume and price, you make good money.