Effective spread - concept

[Flashback]

Effective spread is an implicit cost. Various traders may have different explicit costs. Those are not same for all traders. Effective spread is related to trader’s skill.

[googs1484]

@RickBankiel

@googs1484

Reading 29 Section 2.2.1 in CFAI curriculum.

The effective spread is two times the deviation of the actual execution price from the midpoint of the market quote at the time an order is entered. (If parts of the order execute at different prices, the weighted-average execution price is used in computing the deviation from the midpoint.) The quoted spread is the simplest measure of round-trip transaction costs for an average-size order. The effective spread is a better representation of the true cost of a round-trip transaction because it captures both price improvement (i.e., execution within the quoted spread at a price such that the trader is benefited) and the tendency for larger orders to move prices (market impact).

Great. Now look at the blue box (example 1). And look at the 2017 PM Mock exam. The last two show a different method. Will be invalidated 100%.

Hi Rick,

Your original post said in the book, and thats why I quoted and bolded your comment. The book is very clear. Now, I understand your frustration and I am NOT saying I disagree with your conclusions here. However, if you weight a mock question over what the actual CBOK has and the blue boxes, then that is a flawed mindset. Just my 2 cents.

[andrevc]

Well. googs’ rationale makes sense. However, since CFAI focus so much on fairness, showing the same material in two different contradictory ways is, to say the least, unfair. Any question on the subject should definitely be invalidated.