What is the definition of the minimum quotation spread in securities trading?

What is the definition of the minimum quotation spread in securities trading?

• A. The maximum range between bid and ask prices
• B. The minimum acceptable range between bid and ask prices
• C. The fixed price difference between all securities
• D. The average bid and ask range established by regulatory bodies

Answer: (B)

The definition of the minimum quotation spread in securities trading refers to the minimum acceptable range between the bid price and the ask price. This concept is essential in maintaining market liquidity and ensuring that traders can execute orders efficiently without excessive price discrepancies. By establishing a minimum spread, marketplaces seek to foster a fair trading environment that protects both buyers and sellers.

In markets with a minimum quotation spread, traders are assured that there is a defined limit to how far apart the buy (bid) and sell (ask) prices can be. This also helps to streamline the trading process and can reduce the potential for market manipulation, as it prevents prices from being set too far apart to the detriment of the participants.

The other choices do not accurately capture the nuanced definition of the minimum quotation spread. For example, describing it as the maximum range misrepresents its purpose, as the spread is not about capping price differences but rather ensuring a minimum threshold. The notion of a fixed price difference does not apply, as spreads can vary among different securities and market conditions. Lastly, while regulatory bodies do have a role in determining acceptable practices, the average bid and ask range does not specifically define the minimum quotation spread.