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Lesson 4 of 8 · 14 min
Exchange trading: the order book, the bid-ask spread and VWAP
On an exchange, member broker-dealers bring orders to a central matching system; trading costs are explicit fees plus implicit costs such as the bid-ask spread, which you read from the limit order book alongside the mid-market price, fill prices and VWAP.
In short
- An exchange is a rules-based venue with set trading hours and a central order matching system; broker-dealer members route client orders as agents, usually in lots of at least 100 shares.
- A designated market maker buys, sells or holds shares to keep trading orderly at the open, the close and in imbalances.
- Costs: explicit (fees, commissions) and implicit, such as the bid-ask spread = lowest ask − highest bid, also quoted as a percentage of the lowest ask.
- Mid-market price = (lowest ask + highest bid) / 2; a large market order walks up the book and pays more than the mid.
- VWAP weights each trade price by its volume; listing requires minimum shareholders, holdings, net worth or profit and a minimum public float.
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