How does the broker bypass the spread and use that ask bid difference to make a profit from the investor
3/19/2024 11:50am
The broker typically doesn't bypass the spread to make a profit from the investor. Instead, the broker earns revenue through the spread by acting as a market maker. Here's how it works:1. Bid-Ask Spread: The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an asset in the market.2. Market Maker Role: Brokers often act as market makers, providing liquidity to the market by offering to buy and sell securities at the bid and ask prices, respectively. They facilitate trades by matching buyers and sellers.3. Transaction Cost: The spread is a transaction cost that goes into the pocket of the market maker, which includes the broker. It's a way for them to earn revenue for providing liquidity and managing risk.4. Investor Impact: The spread affects investors who buy or sell securities. When buying, they pay the ask price, which includes the spread. When selling, they receive the bid price, which also includes the spread. The spread is a cost that reduces the profit potential for investors.So, the broker doesn't bypass the spread to make a profit from the investor. Instead, they use the spread as a source of revenue and to manage risk in their market making activities.