How the effective spread can be gamed?

CFA Level III Portfolio Management
#1

Does it depends upon benchmark selected?

Or does it depend upon liquidity offered by trader?

Can anybody explain?

#2

effective spread cab be gamed by waiting for trader to come to him

Bid 10.3 Ask 10.9

Mid quote = 10.6

quoted spread = 0.6

Effective spread = 2 (execution price - mid quote)

suppose buyer is looking to avoid execution uncertainity & fulfills order at ask 10.9

so effective spread = 2 (10.9 - 10.6) = 0.6

If he chooses to wait till the time seller revises his price downward & send an order at current bid price in order to seek liquidity

Effective spread = 2 (10.3-10.6) = - 0.6

which is -ve. If the trader is benchmarked against effective spread which is -ve. So he did well

#3

Thanks once again rahul.

(It’s going to be a long journey in this last volume of the curriculum…and I heard that GIPS is very nice for headaches…)

#4

thanks!..also kindly help me understand how a negative effective spread is a good thing?

#5

meshed, with a negative effective spread he actually bought below mid quote (the ‘benchmark’).

#6

Thanks Rahul