Realized Spread

Install and import#

npm install fintech-algorithms

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

Signature#

realizedSpread(bidAtTrade, askAtTrade, tradePrice, side, bidAfter, askAfter, horizonSeconds)

The effective spread measured against the midpoint *after* a horizon, which strips out the permanent price impact and leaves what the liquidity provider actually earned. The horizon choice is a modelling decision, not a detail.

Parameters#

Returns#

{ realized_spread, price_impact, effective_spread, … }

The realized spread with the price impact it decomposes against — the two sum to the effective spread.

Errors#

• When horizonSeconds is negative, or a quote is invalid — 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#

100

100.08

100.07

"buy"

100.11

100.19

300

Call#

realizedSpread(bidAtTrade, askAtTrade, tradePrice, side, bidAfter, askAfter, horizonSeconds)

Returns#

object with 18 fields: model, side, direction, trade_price, midpoint_at_trade, midpoint_after, bid_after, ask_after, …

{
  "model": "realized-spread",
  "side": "buy",
  "direction": 1,
  "trade_price": 100.07,
  "midpoint_at_trade": 100.03999999999999,
  "midpoint_after": 100.15,
  "bid_after": 100.11,
  "ask_after": 100.19,
  "horizon_seconds": 300,
  "effective_spread": 0.060000000000002274,
  "realized_spread": -0.160000000000025,
  "realized_spread_relative": -0.0015993602558978912,
  "realized_spread_bps": -15.993602558978912,
  "price_impact": 0.22000000000002728
}

Showing 14 of 18 fields.

Other exports#

This module also exports quotedSpread, effectiveSpread, 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#

Calculation flow#

flowchart LR
    A["Question: How much of the execution concession remains after the midpoint moves over a declared horizon?"] --> B["Freeze instrument, scope, clock, units, and variant"]
    B --> C["Validate Realized Spread inputs"]
    C --> D{"Eligible and synchronized?"}
    D -- "No" --> E["Reject with topic-specific reason"]
    D -- "Yes" --> F["Apply the frozen Realized spread formula"]
    F --> G["Expose intermediate value and decision state"]
    G --> H{"Direct measure or model-based proxy?"}
    H --> I["Report result with its unit and limitation"]

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 and current FAQ — 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

The rest of the Liquidity and Spreads family#

• Quoted SpreadAsk minus bid — what the book advertises.
• Effective SpreadTwice the signed distance from the midpoint to the trade price — what the trade actually paid.
• Roll Spread EstimatorInfers the effective spread from the negative serial covariance of price changes alone — no quote data required.
• Amihud Illiquidity RatioAverage absolute return per unit of dollar volume — how much price moves per dollar traded.
• Corwin-Schultz Spread EstimatorEstimates the spread from daily high-low ranges over two days, exploiting that the range reflects both volatility and spread wh…