Quoted Spread

Install and import

bash

npm install fintech-algorithms

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

Signature

quotedSpread(bid, ask)

Ask minus bid — what the book advertises. The upper bound on what a small marketable order costs, and routinely wider than what trades actually pay.

Parameters

Name	Type	Notes
`bid`	`number`	Best bid price.
`ask`	`number`	Best ask price; must not be below the bid.

Returns

{ spread, relative_spread, midpoint, … }

The absolute spread with its relative form in basis points, which is the comparable one across instruments.

Errors

When ask is below bid, or either is not positive — 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

Call

quotedSpread(bid, ask)

Returns

object with 8 fields: model, bid, ask, midpoint, quoted_spread, quoted_spread_relative, quoted_spread_bps, state

{
  "model": "quoted-spread",
  "bid": 100,
  "ask": 100.08,
  "midpoint": 100.03999999999999,
  "quoted_spread": 0.0799999999999983,
  "quoted_spread_relative": 0.0007996801279488034,
  "quoted_spread_bps": 7.996801279488034,
  "state": "two-sided"
}

Other exports

This module also exports effectiveSpread, 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