Effective spread - concept

CFA Level III Portfolio Management
#1

Guys,

If the market bid-ask spread is composed of the best bid and best ask available, how can a buy order be executed at a price inferior to the market ask? I can understand when the buy order is at a higher price, because the volume of shares the trader may want to buy is not available at the lowest ask price but how can it be lower?

See the example from Schweser below.

“Suppose a trader is quoted a market bid price of $11,50 and an ask of $11,56. Calculate and interpret the effective spread for a buy order, given an executed price of $11.55”.

Thanks!

#2

Well, the way the curriculum describes it is another dealer in the security may step in front of and improve upon the prior best ask if they deem the profit on the trade to still be acceptable.

#3

That makes sense. Can anyone confirm it?

#4

well if the curriculum says it then Jay’s probably right.