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Kindly explain the term spread crossing or crossing the spread. I know that it is connected with stock terminology, but I can't find a definition.

Figure 4 reveals that, broadly speaking, we have learned momentum-based strategies: for instance, for each of the four features that contain directional information (Price, Smart Price, Trade Sign, Bid-Ask Volume Imbalance, and Signed Transaction Volume), higher values of the feature (which all indicate either rising execution prices, rising midpoints, or buying pressure in the form of spread-crossing) are accompanied by greater frequency of buying in the learned policies.

From the paper "Machine Learning for Market Microstructure and High Frequency Trading" by Michael Kearns and Yuriy Nevmyvaka.

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    This is one of those "jargon specific to a narrow field" questions that have been discussed on meta, and I haven't yet been swayed one way or the other if it is on topic for this site. That said, there are both Personal Finance and Economist SE sites where you may get more attention for this question.
    – cobaltduck
    Commented Nov 16, 2015 at 18:43
  • @cobaltduck why didn't you add the jargon tag? There are 102 questions linked to that tag.
    – Mari-Lou A
    Commented Nov 17, 2015 at 8:24
  • @Mari-LouA: It looks like jargon and terminology tags are synonyms. I typed jargon, then SE changed it to terminology.
    – cobaltduck
    Commented Nov 17, 2015 at 13:07
  • @cobaltduck that would explain it. Good to know.
    – Mari-Lou A
    Commented Nov 17, 2015 at 13:08
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    I’m voting to close this question because I do believe it's a far better fit on Economics.SE rather than on a site devoted to standard English usage. Commented Aug 13, 2023 at 13:31

2 Answers 2

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In various financial markets, an instrument has two listed prices -- the bid, the current amount that someone is willing to pay to buy the instrument from someone wishing to sell it, and the ask, the current amount that someone is willing to accept to sell the instrument to someone wishing to buy it. For obvious reasons, the bid is less than the ask. The difference between the bid and the ask is called the spread.

A trader crosses the spread when he offers to buy at the ask, i.e., he offers to pay the sellers' price, which is above what other buyers are willing to pay. The trick is that the trader does this on only one exchange, say Chicago. This pushes up the price on the other exchanges, which will recognize that someone is offering more than the instrument is nominally worth. If the trader is fast enough, he can sell a lot of the shares of the instrument in New York at the higher prices before anyone realizes that he engineered the higher price.

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Here's to make it easy to understand. Suppose you go to a second hand car market. There are 10 people there selling a (2015) BMW 320 and they all ask the same price: $10,000 (let's assume that the cars all have the same specs, options and mileage. There are also 10 people running around the market who have offered to buy the BMW for $9,000. This difference between the sell (ask) and buy (bid) price is called "the spread".

At this very moment no trades have occured yet since buyers and sellers did not agree on the price. We call these 10 buyers and sellers "limit buyers / sellers" who have produced "limit orders".

A new person walks in the market, goes to one of the BMW sellers and says "I agree to buy this car for $10,000". The trade occurs (a "market order") and we call this person a "market buyer". The "price" of the BMW is now officially $10,000 since that is the last traded price on the market.

So now that you know the difference between a limit and market order, let's come back to (crossing) the spread. As the day goes on, no new buyers walk in and one of the sellers really wants to sell his BMW today, and so he decides to remove his price tag (meaning he removes his "limit order"), he spots one of the guys who offered to buy his BMW for $9,000 and says "OK, I agree to sell the car to you". The trade occurs ("market order") and this seller who was previously a limit seller becomes a "market seller". The last traded price jumps from $10,000 to $9,000 and here the event of "crossing the spread" has occured.

Just for the record, the limit seller becoming a market seller has nothing to do with the event. It could've been a new person driving his BMW in the market and immediately agreeing to sell it to one of the guys who offer 9,000.

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