Reasons for widening a bid and ask spreads

CFA Level II Economics
#1

I will recap the reasons for widening a bid and ask spreads below, if there are other reasons or if I’m mistaken in one of them, please add your comment;

  1. Lack of Liquidity

  2. Economic Crisis

  3. Small sized transactions

#2
#3

small transactions tightens the bid ask spread

#4

[quote=“125mph”]

Is not large sized transactions give the investor the bargaining power to reduce the ask spread through which the latter will translate the notional amount?

#5

precisely the opposite. If you want to flood the market with 10000000 shares of apple, what do you think will happen? Will you get a deal with bargaining power? Maybe you need help from an execution algorithm, which would attempt to break sell order into small transactions over hours or weeks.

#6

[quote=“carolinesherif”]

It’s not about bargaining power, rather the dealer is now forced to find a matching offer to eliminate their fx exposure. The larger your transaction, the greater the dealer’s fx exposure (which they have to offset), so the greater the risk, hence they want a higher spread to compensate [what constitutes a large/small transaction will depend on the liquidity in the market, since what may be a small transaction in a highly liquid market may be a large transaction in a relatively illiquid market, so the two are related].

#7

Thanks guys.