The Bid-Ask Spread
Chapters in this video
- 0:00 The casino house edge analogy for dealer profit
- 1:08 Bid, ask, and spread defined with customer prices
- 2:47 The golden rule: customer always gets the worst side
- 3:00 Competing market makers and the NBBO construction
- 4:51 Regulation NMS and mandatory best-price routing
- 5:33 How liquidity, competition, and volatility affect spread width
- 7:15 Rapid-fire exam recap
What this video covers
- Why the customer always gets the worst side of the spread (buys at the ask, sells at the bid) and how to apply this to raw dealer quote questions
- How the inside bid and inside ask are selected from competing market makers to form the National Best Bid and Offer (NBBO)
- What Regulation National Market System (Regulation NMS) requires: broker-dealers must route orders to the venue with the best price, not just any valid quote
- Why high liquidity and competition narrow the spread, while low volume, illiquidity, and volatility widen it
- How to calculate the NBBO spread in dollars from multiple market maker quotes
- Why a wide spread signals dealer risk from low liquidity or volatility, not market manipulation or fraud
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