# Is making a bid/ask offer a good way to lower the spreads?

I have written an algorithmic trading program which relies heavily on low spreads in the 0.1-0.3 PIP region. I was now wondering if it would be a good idea to place bid/ask offers instead of limit orders to guarantee a low enough spread.

The problem I see with that is that of course I can't be sure that the trade goes trough. This is also really hard to simulate in backtesting.

So my questions are: 1. How likely is it that my trade remains in the market without anyone "buying" it? (Say my offer will be put exactly between the bid/ask prices) 2. How can I simulate that?

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can you pls check your spelling at the very least, this is 2012, most every browser has a spell check function. Furthermore I vote to have this question closed. What do you want to know? Simulating a limit order book is one of the hardest things to do. I am not sure you wanna go down that route at your "current stage". And as Louis correctly pointed out each fx execution venue will impact the limit order book differently. Its simply impossible to simulate unless you pick a specific one and have specific observations you can build into your fill simulator. – Matt Wolf Nov 25 '12 at 16:39
No it is not really impossible, from a historic order book, which I will analyze, I can calculate the probability to have a matching order within an acceptable time. – Ralf Nov 25 '12 at 20:18
@Ralf You can't just calculate the probability of a fill just by looking at the historic order book. This question gets asked a lot [ 1, 2 ]. It is extremely difficult to also build the software to even handle an order book [ 3, 4, 5, 6, 7 ]. – chrisaycock Nov 26 '12 at 0:33
Nice job on the links! – Matt Wolf Nov 26 '12 at 1:23

First, I assume that when you say:

And I was no wondering if it would be a good idea to place bid/ask offers instead of limit orders...

You mean that you are going to be placing non-marketable limit orders inside the posted bid/ask spread; whereas before you were sending marketable limit orders that crossed the spread.

You didn't mention the type of market data your counter party is giving you, but I'll assume you have some view of a limit order book.