An execution can pay a narrow quoted spread and still be expensive relative to the market a few seconds later. Conversely, a passive fill can earn a favourable price against the current midpoint while losing money after new information arrives. This lesson distinguishes displayed, execution and later-mark spread measures, derives their accounting identity, and explains why a price concession is different from a causal estimate of market impact.
Learning objectives. By the end of this note you should be able to:
- compute quoted, effective and realised spreads for buys and sells;
- reconcile effective spread with realised spread and midpoint movement;
- distinguish full-spread measures from one-way trading costs;
- aggregate spreads with declared weights and horizons;
- derive the elementary Roll spread estimator and state its limitations.
In this lesson
- Three references for one trade
- Worked buy and sell examples
- Timing, signs and aggregation
- When quotes are unavailable: the Roll intuition
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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