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What is a proper (or commonly used/accepted) way of calculating some spot value with tick data? At the moment I can think of two options:

  1. Take the latest available best bid, latest available best ask and find mid. (Trade represents both best bid and ask at the same level)

  2. Take the latest available trade and consider it as a spot price.

The problem with 1 for me is that spread can change dramatically over time, especially in the beginning of trading which can affect the mid and show unrealistic prices. The problem with 2 is that bid-ask can move significantly without any trades being performed and so latest trade wouldn't represent the market situation any more. If the considered asset is not very liquid there come lots of problems (i.e., no bid available at all). I can think of a few tweaks, but I'm quite sure I'm trying to re-invent the thing and there must be a common solution for it. Is there? I.e., how do data providers calculate minutely prices based on tick data?

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1 Answer

Neither is entirely correct. I think you need to find a middle ground here because:

a) Bid and Ask do not have to be identical when a trade occurs. Someone may lift the offer and that results in a trade without ever having bid the asset

b) The last trade may have occurred some time ago as pointed out and true value will most likely lie somewhere between bid and offer.

Having said that, I believe market accepted standard is to take the last trade as true value because that is where two counterparties agreed to conduct business. Just because someone shows buy and someone else sell interest does not mean that anyone is willing to trade at levels away from their shown interest and thus true value is not reflected in current bid/offers alone.

I would take the last trade as "true value" but if bid/offers are significantly away from the last traded price and if bid and offers are regularly refreshed, meaning market participants stand ready to trade at such indications then I would mark true value as the bid-offer mid price.

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a) Why not? Trade performed is when someone places an order with bid matching someone's ask. They are indistinguishable at this point... Agree on all other comments. I was thinking if I'd like to reconstruct 1 minute quotes take latest trade in that minute, if not exists, take best latest bid & ask. –  sashkello Sep 23 '13 at 6:30
    
Incorrect, a bid and ask reflects an entry in the limit order book. When you enter a market buy order then it never enters the central limit order book but it will be matched against the best offer(s), hence, rather than seeing identical bid-offer levels you actually may see an initial spread widening, given the best offer is taken out. –  Matt Wolf Sep 23 '13 at 8:24
    
Well, I do see trades in tick data - the price the trade is performed can be treated as a fair market price at the point, can't it? At this point best price offer and ask can change to be wider, yes. This is what I mean. –  sashkello Sep 23 '13 at 8:41
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