Who determines the spread?

LON:RMG · Jul 22, 2015

Who determines the spread on equities?

I always assumed that the exchange itself did, but why then the variance (often large) in spread sizes? On what decision is the spread size based?

For example, the spread on Management Resources (MRS) seems especially excessive:

http://www.londonstockexchange.com/...ny-summary/GB00B8BL4R23GBGBXASQ1.html?lang=en

The 30% spread is essentially preventing big buyers, so why is it so?

malaguti · Jul 23, 2015

LON:RMG said:
Who determines the spread on equities?

I always assumed that the exchange itself did, but why then the variance (often large) in spread sizes? On what decision is the spread size based?

For example, the spread on Management Resources (MRS) seems especially excessive:

http://www.londonstockexchange.com/...ny-summary/GB00B8BL4R23GBGBXASQ1.html?lang=en

The 30% spread is essentially preventing big buyers, so why is it so?

From LSE:

Bid Offer Spread
The difference between the bid price (at which the holder can sell shares) and the offer price (at which the holder can buy shares). On occasion this can be quite large and depends on the equitys underlying price, liquidity, volatility and a number of other factors.
Many unit trusts also have a bid-offer spread and effectively this amounts to an extra exit charge when the investor sells

the volume on this one is the key, just 118000 shares trades

LON:RMG · Jul 23, 2015

malaguti said:
From LSE:

Bid Offer Spread
The difference between the bid price (at which the holder can sell shares) and the offer price (at which the holder can buy shares). On occasion this can be quite large and depends on the equitys underlying price, liquidity, volatility and a number of other factors.
Many unit trusts also have a bid-offer spread and effectively this amounts to an extra exit charge when the investor sells

the volume on this one is the key, just 118000 shares trades

Yeah, and the tiny market cap likely contributes too.

I did happen to read that text before, but it really doesn't make it clear who makes the decision. The market makers? LSE? Discretionary or systematic spread determination process? Man or machine?

The part that confuses me most is that whomever it is, the huge spread on MRS is essentially preventing the influx of buys it should be getting, as the instant you buy, you lose 30%.

CityTrader · Jul 23, 2015

As an ex market- maker I feel more than quaiified to answer this:

The spread is determined by a couple of things - in SETS ('order driven market") there's the best bid and the best offer - if it's wide, it's wide. On SEAQ the market makers create a price ( this market is known as "quote driven") any market maker registered in that security can go on the bid or the offer as they choose- maybe narrowing the spread. Then of course you have the hybrid system known as SETSMM which is a combination of the 2 ( quote driven & order driven) I hope that makes sense...

LON:RMG · Jul 23, 2015

CityTrader said:
As an ex market- maker I feel more than quaiified to answer this:

The spread is determined by a couple of things - in SETS ('order driven market") there's the best bid and the best offer - if it's wide, it's wide. On SEAQ the market makers create a price ( this market is known as "quote driven") any market maker registered in that security can go on the bid or the offer as they choose- maybe narrowing the spread. Then of course you have the hybrid system known as SETSMM which is a combination of the 2 ( quote driven & order driven) I hope that makes sense...

Thanks citytrader, I understand the three now. I assume that MRS (the company listed in the OP) trades through SEAQ, given the order type O as opposed to AT? The market makers would see the illiquidity and low market cap, and essentially choose to mitigate their risk by widening the spread?

There is a great article here if anyone else is interested in the different types of spread:
http://www.proactiveinvestors.co.uk...o-the-london-stock-exchanges-setsmm-0379.html

CityTrader · Jul 23, 2015

It is indeed a SEAQ stock. TBH the markets makers spread of 2p is disgraceful - that's 50% of the price. That I would guess is a reflection , of low liquidity, high volatility and perhaps a lack of institutional business . Hopefully there should be a much tighter price via the RSP system ( Retail service provider)

Wow just look at the chart - the volatility is through the roof 320 a few years ago to 5p now...

LON:RMG · Jul 23, 2015

CityTrader said:
It is indeed a SEAQ stock. TBH the markets makers spread of 2p is disgraceful - that's 50% of the price. That I would guess is a reflection , of low liquidity, high volatility and perhaps a lack of institutional business . Hopefully there should be a much tighter price via the RSP system ( Retail service provider)

Wow just look at the chart - the volatility is through the roof 320 a few years ago to 5p now...

Haha yeah, they have run into some troubles with their acquisition plans but underneath it all the underlying business is still as good as ever. The full costs of the failed aquisition of D&M group (which is the only aquisition they have attempted) is capped at under $800k AUD, but the market is acting like this will bankrupt them. I have bought in with a fair size order given the market cap, got in at 5.40 and I have a price target in mind which is near triple that price. It'll be interesting to see how soon it gets hit. The big problem at the moment is the big buyers are essentially been prevented by that massive spread.

CityTrader · Jul 24, 2015

I don;t know anything more about the stock other than what you've mentioned. Good luck - i'll keep my eye on them.

LON:RMG said:
Haha yeah, they have run into some troubles with their acquisition plans but underneath it all the underlying business is still as good as ever. The full costs of the failed aquisition of D&M group (which is the only aquisition they have attempted) is capped at under $800k AUD, but the market is acting like this will bankrupt them. I have bought in with a fair size order given the market cap, got in at 5.40 and I have a price target in mind which is near triple that price. It'll be interesting to see how soon it gets hit. The big problem at the moment is the big buyers are essentially been prevented by that massive spread.

LON:RMG · Jan 29, 2016

LON:RMG said:
Haha yeah, they have run into some troubles with their acquisition plans but underneath it all the underlying business is still as good as ever. The full costs of the failed aquisition of D&M group (which is the only aquisition they have attempted) is capped at under $800k AUD, but the market is acting like this will bankrupt them. I have bought in with a fair size order given the market cap, got in at 5.40 and I have a price target in mind which is near triple that price. It'll be interesting to see how soon it gets hit. The big problem at the moment is the big buyers are essentially been prevented by that massive spread.

....And it all worked out.

CityTrader · Jan 30, 2016

If you need to know more about the spread and how Market Makers work - feel free to contract me - we cover all this on our "learn to trade" course

Who determines the spread?

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