Bid/Ask Spread as a liquidity metric

bid ask spread latoken binance hitbtc trx eth

Bid/Ask Spread as a liquidity metric

Bid-Ask spread is one of the most common liquidity metrics. A large spread decreases liquidity. This is due to the simple fact that the price at which buy and sell orders become executable needs to cross the spread bringing about an increase in execution cost.

Market makers usually try to place orders inside the gap in order to increase the liquidity for traders, however, the gap is normally a result of a fundamental understanding of an increase in the asset risk. The probability of execution for the orders placed inside the gap is high which forces the market maker to place orders with lower quantity or frequency.

The Bid/Ask spread (    (Ask – Bid)/Bid   ) KPI is easy to calculate and easy to compare. When the ratio decreases, the pair is becoming more liquid. The ratio itself has value and can be compared amid two pairs or one pair in two exchanges.

The following image is the bid/ask spread gap for TRX/ETH in three major exchanges: binance, hitbt and LATOKEN

bid ask spread latoken binance hitbtc trx eth

in this article, we mentioned the procedure of reducing bid/ask spread using a market maker and why should exchanges such as LATOKEN or binance use one.