Effective Spread difference, execution, effective, between

LBriscoe

Can someone explain the logic of the effective spread calculation. Mainly, why do we multiply the difference between the execution price and midquote by 2? and then compare it to the quoted spread?

oneboy

Which is the correct calculations for effective spread: 2( Execution - Midpoint) or
2( Midpoint - Execution). The CFA text use it both ways see the bottom of pg 13 and calculations on pg 14 in volume 6 (2010 series)

Darien

Depends on whether you are buying or selling, makes sense?

Windjam

Perhaps it helps to visualize:

--------------------------Bid-----------------------Mid------------------------Ask--------------------------

<--seller underpaid-->||<-------seller happy---------------------------------------------------------->

<-----------------------------------------------------buyer happy--------->||<---buyer ovepaid------>

mp3bu

.



Edited 1 time(s). Last edit at Sunday, May 8, 2011 at 08:52AM by deriv108.

dyga

1. When executed price is bid or ask of the quote
2. don't know how it can be gamed.