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There's something I don't understand about the bid vs ask price spread on fx markets:

For example, assume the lowest ask price is 200, and the highest bid price is 100. So if I want to buy now I need to pay 200, if I want to sell now I will get only 100.

In this situation can't I place a bid order for 101 and it will be the best offer so I will buy shares for this price? And can't I place an ask order for 199. Again, it will be best offer so I will sell shares for this price.

Summarizing, I showed I how to buy for 101 and sell for 199. In this situation spread is my profit, not cost. Where I am wrong?

  • You can't buy a share for 101 unless someone is willing to sell a share for 101 or less. Didn't you start by saying nobody was willing to sell for less than 200? – David Schwartz Oct 22 '18 at 1:31
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A bid is a willingness to buy. If no one agrees to buy from you at 101, your order will not be executed and there is no profit. There is no guarantee that being the best bid will result in trade execution. It is possible that someone else will bid higher than you.

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You are correct regarding NBBO. If you increase the best bid by $1 or decrease the best ask by $1 then you become the best bid, or best ask, or best bid and best ask.

What is incorrect is your assumption that you will be filled at these prices ($101 and $199) and that spread is your profit. Being the best bid or ask does not mean that you will get a fill. In order for that to happen, a counter party must be willing to transact with you at those prices and any counter party who knows what they are doing will simply increase their offer, jump you, and become best bid or best ask.

On the equity side, at times I have been the best bid and best ask in illiquid stocks with wide spreads, willing to sell my current position at the higher price and willing to buy more at the lower price. In normal times, it's rare that you get a fill on both ends. In times like 2008-2009 when volatility reigned, it was very common. Or more recently, last week when the DJIA dropped 1400 points in 2 days.

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