new: market liquidity

- bid-ask spread
- split spread order

content/Finance/Market Liquidity.md

@@ -0,0 +1,47 @@
+---
+Author:
+  - Xinyang YU
+Author Profile:
+  - https://linkedin.com/in/xinyang-yu
+tags:
+  - finance
+Creation Date: 2025-01-30, 14:26
+Last Date: 2025-01-30T15:16:25+08:00
+References: 
+draft: 
+description: The bid-ask spread is the difference between the bid and ask prices, reflecting market liquidity. A narrow spread indicates high liquidity, while a wide spread suggests lower liquidity or higher volatility. Split spread orders help improve market liquidity and reduce trading costs.
+---
+## Bid-Ask Spread
+---
+- The difference between the [[#Ask Price|ask price]] - [[#Bid Price|bid price]]
+
+>[!important] Reflects market liquidity 
+> A **narrow spread** indicates **high liquidity**, while a **wide spread** suggests **lower liquidity or higher volatility**.
+> 
+> Liquidity is often measured as the **bid-ask spread divided by the ask price**. High liquidity typically corresponds to a spread of **less than 0.1%**.
+
+>[!important] Negative bid-ask spread 
+> This happens when **seller is selling** at a **price lower** (ask price) than the **price the seller** is **willing to purchase** (bid).
+> 
+> If a negative spread exists, traders can **buy at the lower ask price** and **sell at the higher bid price**, creating a **risk-free arbitrage opportunity**. This activity quickly corrects the spread back to positive in efficient markets.
+
+### Bid Price
+- The price at which buyers are willing to purchase an asset
+- **Sellers receive this price** when they sell the asset 
+
+### Ask Price
+- The price at which sellers are willing to sell an asset
+- **Buyers pay this price** when they purchase the asset
+
+
+## Split Spread Order 
+---
+- Placing split spread orders involves submitting orders that are **priced within** the [[#Bid-Ask Spread|bid-ask spread]] of a security
+
+>[!important] Typically add liquidity to the market
+> In some cases, exchanges may **provide rebates for adding liquidity**. 
+> 
+> For example, if the bid is $10 and the ask is $11, a split spread order placed at $10.50 creates a new price level for potential trades, enhancing market depth and liquidity.
+> 
+> Split spread orders are particularly **useful in markets with wide bid-ask spreads**, such as ETFs or less liquid securities. These orders can help reduce trading costs and improve execution efficiency. ETFs often have wider bid-ask spreads because they **consist of baskets of underlying securities**.
+