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Can anyone explain to me what trading inside/ outside the spread mean?

And why are trades that occured outside the spread are to be considered anomalous?

Thanks

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    $\begingroup$ Do you know what is meant by the spread? $\endgroup$
    – Bob Jansen
    Jun 18 '20 at 9:30
  • $\begingroup$ Yes I do, it's the difference between the best ask and the best bid $\endgroup$ Jun 18 '20 at 9:35
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    $\begingroup$ OK, so if you want to buy a small amount of shares, what price would you pay? If someone told you they are going to buy at a price higher than this, what would you say to him? $\endgroup$
    – noob2
    Jun 18 '20 at 9:38
  • $\begingroup$ I would pay the bid, and if someone is willing to buy at a price higher than,this, this would be called trading inside the spread? If so, what would be a figure case of trading outside the spread? $\endgroup$ Jun 18 '20 at 9:44
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    $\begingroup$ The spread is between bid at say 10 and ask at say 10.5. If you buy at higher than 10.5 for ex 11 you are outside the spread and you are doing something anomalous because why did you not buy from the marketmaker who was willing to sell it to you for 10.5. It would seem that you wasted 0.5. $\endgroup$
    – noob2
    Jun 18 '20 at 9:50
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Consider this schematic of the bid-ask spread. Now think about a trade happening somewhere on the horizontal line. When would you say it's inside or outside? How can a trade be in the outside area?

The spread

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  • $\begingroup$ I feel like this should have been drawn with a crayon. $\endgroup$ Jun 18 '20 at 17:27

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