why do we need spreads?

Discussion in 'Trading' started by Gordon Gekko, Dec 10, 2002.

  1. why can't computers handle the buying & selling and come up with 1 price for everything? why does the ES need a .25 spread? why do stocks sometimes have huge spreads? i know it's because of volatility, but so what. a computer should come up with 1 price. if i want to sell a baseball card, i don't have a bid and an ask. it will sell for the price i decide to sell it for. why should the markets be any different? why can't we make this all electronic and have 1 price for everything?
  2. supply and demand

    If you want to sell it..........your a seller and you can sell it at your price if you can find a buyer

    Let's say you want to sell it for $100

    But nobody feels it is worth that. The highest you can get from a dealer is $75.

    So either you have to come down in price or the dealer comes up

    for a sale to occur
  3. There is a real smart guy by the name of Whitcomb who used to be an academic (still is) and then set up a firm called ADT (automated trading desk) that is extremely successful. Look up his papers, he had a real nice co-authored peace back in the 80s I think that explained why there ALWAYS will be a spread.
    There are also other studies that show why spreads exist, what they are composed of (3 components typically - adverse selection, order processing and inventory holding) etc etc. Sorry man, but this is smth you'll never get rid of :)
    Let me know if you are interested, I'll point you to a number of studies that will answer your questions in detail.
  4. let's just take the ES, for example...

    say the last price was 900. why can't we tell a computer the total number of shares/contracts/whatever. as more (or larger sized) buys come in than sells, the computer calculates it and adjusts the price higher. if nobody wants to buy, then there will be more or larger sells and the computer will adjust the price down. this could be done with 1 price.

    p.s. the stock i have right now, BBA.....the bid is 4.55 and the ask is 4.74. the stock has done nothing the last few minutes...and a little while ago the spread was much tighter. is there really a need to make the spread that wide?! no! the last thing we need is some guy (specialist) fiddling with prices. let's get rid of them all and replace them with computers. IF spreads are a must, at least make them computer controlled. not decided arbitrarily by some guy with an agenda.
  5. Dustin


    That's why you're a daytrader. Cut the spread in half...take some risk and make some money. The idea of a computer keeping inventory at one price doesn't make sense for an auction market.
  6. You do understand Market Making don't you ...
  7. for the record, i'm not claiming i know everything or that i'm even right. i'm just stating my opinion based on how i see things. if someone can prove me wrong, fine.
  8. rs7


    Agreed. And in reality, perhaps this is the last hurrah of the specialist error. Indeed they serve less and less of a function as ecn's become more a part of trading.

    Going to decimalization, along with allowing listed stocks to trade OTC has given the specialists two things. A look at a future that likely does not include their existence, and a chance to get in their last licks. To kill us as traders in a most efficient way. They were always pretty good at this. Now, with the assistance of technology and decimalization, they are GREAT at it. Hopefully (for us) their days are numbered. But then again, it is always hard to shake the devil. These guys are demons!! We can only hope.

    As far as maintaining a "fair and orderly market".....HAH!! Fair for whom?

  9. We are not MMs; but in order to have a liquid market there needs to be an economic incentive to transfer the risk.

    That incentive is the spread ...
  10. catman


    Gordon, no one has to prove you wrong.

    The rules are the rules, that's the way the market trades, and you either accept it and go with it or you don't.
    #10     Dec 10, 2002