Question

1. What is the bid-ask spread and how does it affect market orders versus limit orders?

2. Prior to 2001, the US exchanges quoted stock prices in fractions, and 1/8 or ¼ (12.5 or 25 cents respectively) was the minimum bid-ask increment. Would that make it easier or harder for individuals to profit from the bid-ask spread?

Answer 1

1. Bid-Ask spread is the difference between ( by a buyer) the highest bidding price and (by a seller) the lowest asking price on the exchanges.

Higher spreads can cost the market orders to be filled at a significant cost while limit orders are less affected than the market orders as they tend to get filled up when their price is met

2. This would make it easier for individuals to profit as the spreads have decreased to as low as one cent and thus can jump in and out with a higher probability of making a profit since it will also decrease their execution cost.