Bid-Ask Spread Impact
The bid-ask spread impact is the cost incurred by paying the difference between the buy and sell price in a market. For a market maker or a hedger, this spread represents a direct cost that must be overcome to achieve profitability.
In highly liquid markets, the spread is narrow, but in crypto, it can widen significantly during periods of low liquidity or high volatility. Consistently paying the spread can erode the performance of any trading strategy over time.
Effective traders seek to minimize this impact by using limit orders instead of market orders whenever possible to capture the spread rather than pay it.
Glossary
Crypto Options
Asset ⎊ Crypto options represent derivative contracts granting the holder the right, but not the obligation, to buy or sell a specified cryptocurrency at a predetermined price on or before a specified date.
Limit Order
Execution ⎊ A limit order within cryptocurrency, options, and derivatives markets represents a directive to buy or sell an asset at a specified price, or better.
Liquidity Provision
Mechanism ⎊ Liquidity provision functions as the foundational process where market participants, often termed liquidity providers, commit capital to decentralized pools or order books to facilitate seamless trade execution.
Order Book
Structure ⎊ An order book is an electronic list of buy and sell orders for a specific financial instrument, organized by price level, that provides real-time market depth and liquidity information.
Delta Hedging
Application ⎊ Delta hedging, within cryptocurrency options and financial derivatives, represents a dynamic trading strategy aimed at neutralizing directional risk arising from option positions.
Order Flow
Flow ⎊ Order flow represents the totality of buy and sell orders executing within a specific market, providing a granular view of aggregated participant intentions.
Market Makers
Liquidity ⎊ Market makers provide continuous buy and sell quotes to ensure seamless asset transition in decentralized and centralized exchanges.