Bid–Ask Spreads, Auctions and Market Impact

The last price is history

The price on the screen may be the last completed trade. Your next transaction depends on current counterparties and the size available. A previous sale at $5 does not promise that you can buy or sell your entire parcel at $5.

The bid–ask spread is the gap between quoted buying and selling prices. It is one form of friction. Market impact is the price movement associated with executing an order; distinguishing your impact from unrelated market movement requires care.

A hypothetical order book

Imagine 1,000 shares offered at $5.00 and another 1,000 at $5.05, with no other change while the order executes. A 2,000-share purchase consuming both levels costs $10,050, or $5.025 per share, before brokerage. The headline $5 quote described only half the required quantity.

A smaller order may avoid that second level. Splitting an order does not guarantee a saving: later quotes can deteriorate, repeated brokerage can accumulate, and some orders may never fill. Implementation is a trade-off, rather than a free improvement.

Auctions bring orders together

During an auction, eligible orders are collected and matched using the exchange’s auction rules at a common matching price. This differs from continuous trading, where compatible orders match as they arrive.

The indicative auction price can change before the match as orders enter, change or leave. Treat it as an indication, not an executed result. ASX uses auctions around the opening and closing and in other circumstances, including some resumptions after halts.

Check the current exchange timetable and your broker’s supported instructions. Familiar recollections about opening sequences may be outdated. A scheduled market phase does not ensure that a particular security is trading normally.

Liquidity has more than one layer

For an ETF, exchange turnover alone is an incomplete description of liquidity. Underlying assets, market makers and creation/redemption arrangements also matter. When underlying markets are closed or stressed, pricing uncertainty can affect the spread.

For any holding, compare your quantity with available depth, not just recent daily volume. Quotes can change before your instruction arrives. A large visible order can also reveal your intentions.

Make friction part of the plan

A strategy that relies on small frequent gains is more sensitive to repeated execution costs than one that trades infrequently. A low-bandwidth investor may prefer a process with fewer decisions, but still needs a sensible execution check.

Record the decision price, execution price and costs. A poor fill is an implementation problem to investigate; it does not automatically invalidate the investment thesis.

What to do with this

For your next hypothetical order, calculate the cost of filling the intended quantity from the visible book, then compare it with a single-price estimate. Note where the real result could differ.