The spread

[Green trader]

Hi guys,
I have been studying the stock market and its processes for about 18 months and it all seems logical and straightforward except for one seemingly basic thing -the spread. As far as i have ascertained when one trader (A) sells his shares to trader (B) for lets say $10 then that is what B pays to A, therefore the bid and offer price are of course the same. But this is not the case there is always a difference. Why, and who is the middle man who pockets the spread. Sounds like a good gig to me
Thanks in advance for any help.

 

[cynic]

Hi guys,
I have been studying the stock market and its processes for about 18 months and it all seems logical and straightforward except for one seemingly basic thing -the spread. As far as i have ascertained when one trader (A) sells his shares to trader (B) for lets say $10 then that is what B pays to A, therefore the bid and offer price are of course the same. But this is not the case there is always a difference. Why, and who is the middle man who pockets the spread. Sounds like a good gig to me
Thanks in advance for any help.

What you seem to be observing is the "market spread" between the best available (yet still unsatisfied) bids and offers. The reason that there must always be a difference between the two, is quite simply that, as soon as price agreement is reached, a trade is effected, fully satisfying one party and at least partially satisfying the other.

 

[Wysiwyg]

Another way to look at is the spread has to be crossed for a transaction to take place. If in your example the buyer was not prepared to wait for a seller to cross the spread then the buyer would cross the spread and pay the sellers asking price, e.g. $10.01.

Pocket the spread?
CFD / FX trading providers do set their own spreads and that spread amount goes directly to them when your trade price is executed. They are artificial markets and the quoted price may not be guaranteed (as they state).

 

[OmegaTrader]

Hi guys,
I have been studying the stock market and its processes for about 18 months and it all seems logical and straightforward except for one seemingly basic thing -the spread. As far as i have ascertained when one trader (A) sells his shares to trader (B) for lets say $10 then that is what B pays to A, therefore the bid and offer price are of course the same. But this is not the case there is always a difference. Why, and who is the middle man who pockets the spread. Sounds like a good gig to me
Thanks in advance for any help.

I suppose I think of it as not prepared to wait fee or a market making risk fee.
If you wait then you can buy without spread as stated above.

Also spread is usually very minimal especially compared to commission unless it is an illiquid market eg small cap or extreme market moves.
The risk capturing the spread for a market maker is big moves without being able to hedge their bets.
This of course involves really fast computers and some would argue silly buggers.

For example when I put a bid on the asx commsec puts the quote through CHI-X. The market maker sees the quote through CHI-X and puts on the asx order before my order even appears!!!!!
I knew this because the asset was illiquid and there was no other volume.



There are market makers that get rebates for volume and take some of the spread. Also some companies pay exchange fees to be directly linked, all with the same length cord hahaha so no one has an advantage.
I read that somewhere...

I don't think it is that common for retail traders to be market makers.

Just in my opinion as an armchair critic

Hard to get a free lunch need knowledge and computers to play that game or be specialised in a specific area/play.

In long term/medium investing I don't think it is a major issue unless the spread is exorbitant.