easy · Market Microstructure
A stock has a quoted spread of 4 cents and an effective spread of 2.8 cents.
What does the ratio of effective spread to quoted spread (0.70) reveal about where and how orders are being executed?
- Orders are executing at prices worse than the quoted spread, indicating market fragmentation
- 30% of order flow is being executed at the midpoint or better, consistent with significant internalization or midpoint crossing
- The market maker is earning the full half-spread on all trades
- The quoted spread is artificially wide due to a regulatory tick-size constraint
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