How to determine if a bid-ask spread is "good" or "bad"?

Question

Is it possible to weight the bid-ask spread? I'll explain ...

In the moment, for a share X, to trade I use the price, volume, $ volume, # trades, % chg and the bid-ask spread (BAS). To make day trading on the OTC market, it is quite easy to judge humanly what differentiates a good from a bad BAS. However, it is not so easy to program it. How can we describe a good from a bad BAS mathematically?

As far as I'm concerned, if the BAS is large enough, then it is good to do scalping strategy and if it is small enough, then it is good for standard day trading. How could we define 'large enough' and 'small enough' mathematically? Any help?

I give you an example :

Share    bidPrice   bidSize   askPrice  askSize
   1     0.0004     4499998   0.001     11203000
   2     1.86       875       1.88        1200

Do you understand that even if 1.88 - 1.86 = 0.02 > 0.001-0.0004 = 0.0006, I prefer to buy 1000$ of the second action than the first one? The probability that the BAS(action 1) becomes small enough is lower than the BAS(action 2) becomes small enough.

BAS, askSize, bidSize, and volatility are probably variables to consider.

Answer 1

All B/A spreads are bad because the stock must move that much for you to break even, ignoring commissions. Both are part of the cost of doing business, as are borrow costs for shorting. The objective is to make money on the trade not pay less spread.

You can weight the B/A spread any way that you want for your programming but it won't change actual trading results. Executions occur only if the participants are willing to trade at the market (any price at or between the spread).

Yes, the spread of your $1.88 stock is greater than your penny stock. But look at the size that's needed to move the penny stock. Is that significant? The big picture would be what's the average daily volume and volatility of the stock? If your penny stock trades millions of shares per day but its price never moves, what's your achievement, you paid a lower spread?

If you think that you have an edge and your trading strategy performs well in back testing, you have to base it on market prices. Anything better than that is unknown and can't be assumed. Better fills will be gravy.