Effective Spread

Install and import

bash

npm install fintech-algorithms

import { effectiveSpread } from "fintech-algorithms/market-microstructure/liquidity-and-spreads/effective-spread";

Signature

effectiveSpread(bid, ask, tradePrice, side)

Twice the signed distance from the midpoint to the trade price — what the trade actually paid. Narrower than the quoted spread when trades execute inside it, wider when they sweep.

Parameters

Name	Type	Notes
`bid`	`number`	Best bid at the time of the trade.
`ask`	`number`	Best ask at the time of the trade.
`tradePrice`	`number`	Executed price.
`side`	`"buy" \| "sell"`	Trade direction, usually from a classifier in D11-F01.

Returns

{ effective_spread, relative, midpoint, price_improvement }

The effective spread and the price improvement against the quote.

Errors

When side is not buy or sell, or ask is below bid — throws

Complexity: time O(1), space O(1).

Worked example

executed Captured by running this function on the input its own test provides. Real output of real code — but not asserted against a published figure.

Input

bid

ask

100.08

tradePrice

100.07

side

"buy"

Call

effectiveSpread(bid, ask, tradePrice, side)

Returns

object with 17 fields: model, bid, ask, midpoint, quoted_spread, quoted_spread_relative, quoted_spread_bps, state, …

{
  "model": "effective-spread",
  "bid": 100,
  "ask": 100.08,
  "midpoint": 100.03999999999999,
  "quoted_spread": 0.0799999999999983,
  "quoted_spread_relative": 0.0007996801279488034,
  "quoted_spread_bps": 7.996801279488034,
  "state": "inside-quote",
  "trade_price": 100.07,
  "side": "buy",
  "direction": 1,
  "effective_spread": 0.060000000000002274,
  "effective_spread_relative": 0.0005997600959616381,
  "effective_spread_bps": 5.997600959616381
}

Showing 14 of 17 fields.

Other exports

This module also exports quotedSpread, realizedSpread, rollSpread, amihudIlliquidity, corwinSchultzSpread, calculate. Every module additionally exports run as an alias of its primary function, and a meta object carrying its catalog id, domain, family, shape and article URL.

Diagrams

How it works

This page states the contract — how to call it correctly. The article explains the concept: why it works, and where it breaks.

Read the article →

References

SEC Rule 605 adopting release — U.S. Securities and Exchange Commission
NYSE Daily TAQ product description — New York Stock Exchange
2024 Rule 605 Amendments adopting release — U.S. Securities and Exchange Commission
Rule 605 staff frequently asked questions — U.S. Securities and Exchange Commission, Division of Trading and Markets staff
Rule 605 staff FAQ transition — U.S. Securities and Exchange Commission, Division of Trading and Markets staff