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The bid-ask spread can be used to measure transaction costs in a quote-driven OTC market. Can one also use the bid-ask spread to measure transaction costs for an order-driven market?

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  • That sounds more like an economic theory question than a personal finance question...
    – keshlam
    Commented Jun 27, 2015 at 2:14

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Yes you can use bid-ask spreads as one of the elements in transaction costs for order-driven markets. They are a good indicator of liquidity for a particular instrument and something that investors should keep in mind when choosing where to put their money; since being able to get in/out of an investment without losing significant capital in the process is a good thing.

A lot of the debate around whether or not HFT is a good thing, has focused around the estimation of market efficiency by measuring bid-ask spreads.

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