Read the spread in ticks, then in dollars

Question

A stock trades 12.34 bid / 12.37 ask. The minimum price increment (the tick) is \0.01. A customer wants to buy 800 shares immediately by crossing the spread. How wide is the spread in ticks? What does it cost the customer to cross, versus the mid?

Accepted Answer

Spread in ticks. The quotes are 3 cents apart, and each tick is 1 cent, so the spread is \frac{12.37 - 12.34}{0.01} = 3 	ext{ ticks}. The mid is (12.34 + 12.37)/2 = 12.355, so the half-spread is 1.5 cents. Cost to cross, per share. A buyer who takes the offer pays 12.37. Measured against fair value (the mid, 12.355), each share costs 12.37 - 12.355 = 0.015 = 1.5	ext{ cents}. Cost on the full order. 0.015 	imes 800 = \12. That \12 is exactly the half-spread times size, the price of immediacy for the taker, and the reward for the maker who was sitting on the offer. Round trip. If the custome…

Read the spread in ticks, then in dollars

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