What does it cost to cross the spread?

Question

A stock is quoted 99.98 bid, 100.02 offered. You buy one share with a market order, then immediately sell it with another market order. Nothing else changes. What is your P&L, and how should you think about the cost of a single market order? If your trading signal is worth 3 cents, should you trade it with market orders?

Accepted Answer

You buy at 100.02 and sell at 99.98: P&L = -4 cents, you paid the full spread for a round trip. The cleaner accounting is per order, versus mid. The mid is 100.00. Your buy at 100.02 costs the half-spread, 2 cents, relative to mid; so does the sell. Round trip = 2 	imes half-spread = 4 cents. (In real markets you'd also pay fees and, for larger size, market impact, you'd walk deeper into the book beyond the touch.) The 3-cent signal. Suppose you predict the mid will rise 3 cents. Buying with a market order costs 2 cents of half-spread now; to exit with another market order later costs 2 more…

What does it cost to cross the spread?

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