A Cheatsheet for Bid Ask Spreads

This week’s Deep Dive brings you up to date with all things spreads, one of the most frequently used indicators when assessing a market’s liquidity. I’ll focus mainly on the distribution of spreads across base assets, exchanges and quote assets over the last month. It is more important now than ever that traders know what exchanges or pairs will give them best execution on their trade. Kaiko’s order book data makes that possible.

Spreads Refresher

The Bid-Ask Spread is the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. These prices are reflected as bids and asks on an order book, placed by market makers as limit orders. Price takers will place market orders to buy or sell an asset, and in doing so they accept the best bid or best ask determined by the market maker.

Typically, the smaller the spread the more liquid the market. Wide spreads indicate that liquidity is weaker for an asset, and that it will be more difficult to exchange the asset at stable prices, making it an important metric when assessing the overall liquidity of an asset from an investment standpoint. During price volatility, spreads typically widen as market makers hedge their positions to avoid being trapped in an unfavorable price swing.

In these instances, the spread reflects the market maker’s perception of risk surrounding price volatility. If spreads remain wide after a period of volatility, this may indicate that market maker’s predict continued price volatility.

Data

First, a brief explanation of the next few charts used, box and whisker plots, for anyone unfamiliar. These charts enable visual analysis of the distribution of a dataset. The more distributed the data, the longer the “box”, and all “whiskers” are considered outliers. The shaded grey box is the top and bottom end of the interquartile range (IQR), or the range of the 25th percentile to the 75th percentile results. The whiskers are the black bars further out on the ranges, and represent 1.5* the IQR – the point before individual points are considered outliers.

When you see the “real spread” mentioned throughout this article, that refers to the actual spread in basis points (bps) i.e 2 bps = 0.02%. Real spread uses the normalized spread in bps so it can be compared across assets.

USDT Spreads

With that out of the way, let’s take a look at spreads for USDT pairs, crypto’s most liquid stablecoin. The most obvious takeaway is that BTC and ETH spreads for USDT pairs are extremely tight and lower than other top tokens.

The SOL-USDT pair has the widest interquartile range (IQR) and the most outliers, interestingly occurring on crypto’s most liquid exchange, Binance, suggesting Binance’s SOL liquidity is lagging its other pairs. Interestingly, DOGE has tighter USDT spreads than XRP, SOL and ADA. Huobi looks to have the most outliers and higher spreads out of the exchanges chosen. Even more interestingly, Kucoin spreads are impressively lowest for the non BTC/ETH pairs chosen.

Zooming in closer on the highly competitive battle to offer the lowest BTC and ETH spreads, we can see Binance leads the way with the best BTC and ETH spreads, each occurring in a tight range.

Most exchanges have lower BTC spreads than those for ETH, with OKX being the big exception. OKX’s largest outlier this month out of BTC/ETH actually occurred on its BTC pair. Huobi had the highest ETH spreads out of the exchanges chosen and the widest difference between its BTC and ETH spreads, with the second lowest BTC spreads.

Looking at the standard deviation (SD) of spreads, another measure of the variance of spreads on exchanges, Huobi has had the biggest spikes in SD throughout the last year, spiking the most as FTX and Three Arrows Capital collapsed.

Encouragingly, there is less spread variance now on exchanges than a year ago for USDT pairs, with spreads tightening to start this year in particular. Also of note was the lack of a significant spike in spread variance during the US banking crisis in March of this year for USDT pairs,  which we’ll see later wasn’t the case for USD pairs. Looking at spreads, it looks as if USDT pair liquidity has benefitted from the overseas nature of Tether.

USD Spreads

The US banking crisis in March has certainly impacted liquidity for USD pairs in crypto, and that is evident when looking at spreads. You’ll note the difference in axis between the USDT charts earlier and the USD spreads here, being about 3x larger in scale for USD pairs.

Unsurprisingly, BTC and ETH pairs have the best spreads, whilst for the most part being much higher than their USDT counterparts. Binance US has the highest spreads and most outliers for most USD pairs as the US side of the exchange has really struggled to attract market makers and traders lately, resulting in a lack of liquidity. DOGE-USD spreads differ significantly across exchanges, with Kraken and Coinbase offering spreads that rival ETH’s, but Binance.US offering significantly worse liquidity.

Zooming in on BTC and ETH-USD spreads shows us two very interesting trends:

1. Kraken’s BTC are the lowest in the business
2. Coinbase’s BTC spreads have a wider range than its ETH spreads

Looking at the standard deviation of USD pairs per exchange, we can see that volatility of spreads was far higher last year and looks to have also calmed down the last few months, bar a brief spike in March as the US banking issues unfolded.

Stablecoins

To no one’s surprise, pairs with USDT as the quote asset offer the best spreads in crypto. However, the battle for second is quite close , with USDC’s interquartile range just beating out both USD and BUSD pairs.

TUSD spreads paint a tale of two halves. On one side of things, its BTC and ETH spreads are extremely tight thanks to impressive liquidity on the pair after Binance’s zero fee promotion. However, its SOL and XRP spreads range from 8bps and above, widening TUSD’s range of spreads. DAI spreads are the widest and highest, as the stablecoin struggles for relevance on centralized exchanges.

Summary Cheatsheet

Traders need crypto data pre, during and post trade. Spreads play a pivotal role in the execution of a trade and placing a trade on the wrong venue can cost a trader several bps in returns; returns that are at a premium in a bear market.

Below we have given a statistical overview of aggregated spreads for each exchange and quote asset stablecoin. This can be used as a cheat sheet for traders, thanks to Kaiko’s order book data.