Reduced Spread

 By JAMES CHEN

 Updated Oct 3, 2019

What Is Reduced Spread?

A reduced spread is the narrowing of the difference between the bid and ask price for a security, currency, or loan.

KEY TAKEAWAYS

• A reduced spread is the narrowing of the difference between the bid and ask price for a security, currency, or loan.
• This spread reduction is a decrease in the difference between what buyers are willing to pay and what sellers are asking.
• The reduced spread generally translates to a decrease in potential revenue that is generated from the bid/ask spread for brokers and dealers that make a market for that security.

Understanding Reduced Spread

The reduced spread generally translates to a decrease in potential revenue that is generated from the bid/ask spread for brokers and dealers that make a market for that security. This spread reduction is a decrease in the difference between what buyers are willing to pay and what sellers are asking. In most cases, a reduction in the spread signifies that a financial institution will experience a decline in its profit margin that comes from the spread.

Forex dealers and brokers, as well as those in other marketplaces, will usually earn their commission on the spread of bid and ask prices. Brokers work for individuals by placing trades for stocks, bonds, currency, futures, and other investments. Dealers, on the other hand, will usually arrange trades for themselves or large institutional clients. Brokerage fees will vary by the product traded and the company trading those products.

However, depending on the situation, there may be a way for brokers and dealers to offset some of this profit decline. As an example, the broker could minimize operating costs. Forex brokers and lending institutions can use a carefully planned, long-term strategy to offset reduced spreads. Such an approach will include selling Treasury bond futures contracts because there is an inverse relationship between bond prices and interest rates, meaning as interest rates fall, bond prices rise, and vice versa.

Causes of Reduced Spread in Different Markets

The basic concept of reduced spread, in general, is the same in any context, but there are some specific ways it manifests itself in the real world depending on the financial instrument or situation involved.

• For lending institutions, a reduced spread in a loan rate translates into a reduction between the cost of lender-available funds and the interest rate at which these funds are lent out. Factors that impact the spread of lenders include competition from other creditors, less perceived risk in the lending market due to favorable economic conditions, and increased liquidity in the secondary market for these loans.
• In the foreign exchange market, a reduced spread will lower the difference between the currency's purchase price and the asking price. This price difference can be due to an increase in expected volume for the particular currency. Bid-ask spreads contribute to the inefficiencies of matching currency buyers with sellers.
• For the equity market, the reduced spread is a reduction in the gap between the price that a market maker is willing to transact in a deal for a stock, if there are no other counterparties for an order. This reduction is done to ensure liquidity in the trading market, and to allow the generation of additional profit. 

The spread goals of registered traders will vary by company. Much depends on the trading activity, issuer size, and public float. In investing situations, the inability to predict the likelihood of a reduced spread happening, or the degree and frequency to which they occur, is another element that contributes to the level of uncertainty, particularly in long-term investment plans.

Who Is the Richest Person Ever?

 By DAVID FLOYD

 Updated Apr 11, 2020

Some people are unfathomably rich. According to Forbes, as of April 2020, Amazon's Jeff Bezos is the wealthiest man alive, with $113 billion to his name. That's around the combined gross domestic product of Myanmar, Laos, and Cambodia, which have around 74 million people between them.

Surely in our modern world, where technology enables the creation and consolidation of truly incomprehensible wealth, we are living among the richest individuals in history. Turns out, we are not. The world's wealthiest individuals lived in earlier times, in eras in which pure wealth was harder to measure.

KEY TAKEAWAYS

• Jeff Bezos and Bill Gates are among the richest people in the world currently, but in terms of the wealthiest people of all time, they don't make the cut.
• In history, there are wealthier people than the modern billionaires, particularly when you consider those whose wealth and spending could impact the overall health of the economy during the times in which they lived.
• Mansa Musa, the 14th-century emperor of the Malian Empire, spent so extensively that it caused hyperinflation in Cairo and Medina
• Emperor Atahualpa was so wealthy that gold and silver released into Europe following his death caused high inflation and an economic slowdown.

From Genghis Khan to J.P. Morgan

Estimating wealth in bygone eras is difficult because what it means to be wealthy varies widely from epoch to epoch. How do you value the landholdings of Persian emperors? Does multiplying the weight in ounces of Genghis Khan's hoard by $1,700 (the most recent price of gold per ounce, as of April 2020) really tell you what his wealth was worth at the time?

In economies where there was no such thing as a true currency, taxes were levied in barley, and literacy might as well have been rocket science, slapping dollar amounts on things is an exercise in wild speculation.

But that doesn't make it any less fun. Take Marcus Licinius Crassus, with an estimated net worth of $2 trillion. The original value investor, he bought whole swathes of Rome when they were on fire and only sent his army of enslaved builders and architects to put out the flames if the owners paid up. When Spartacus led a rebellion in 73 BCE, Crassus personally fielded two legions. Legend has it that he died when molten gold was poured in his mouth, a potent symbol of his thirst for riches. We don't have to go back to antiquity to find people with truly unsettling wealth, however. John D. Rockefeller had anywhere from $400 billion to $650 billion, depending on the estimate. J. P. Morgan was the U.S. lender of last resort before the Federal Reserve was established, stabilizing the economy through a massive loan to the government following the Panic of 1893.

But rather than trying to measure wealth in absolute terms, maybe it's best to look at who, in their own time and place, was so rich that they personally defined the value of money. In all of history, there are two people who controlled so much wealth relative to everyone else that spending it (voluntarily or not) could send the economy of the known world into a tailspin. 

Amazon's Jeff Bezos, Microsoft's Bill Gates, and Berkshire Hathaway's Warren Buffett are the modern world's wealthiest people.

Mansa Musa

In 1324, Mansa ("Emperor") Musa of the Malian Empire went on hajj, the Muslim pilgrimage to Mecca. His entourage consisted of around 60,000 people and a quantity of gold that sent ripples throughout the entire Mediterranean world. He showered the cities he visited with gold, giving it away to the poor and, according to one account, building a new mosque every Friday. He spent especially lavishly in Cairo and Medina, and the sudden influx of money sent prices for everyday goods soaring.

Realizing that he had personally caused a wave of hyperinflation to plague an entire region, he personally embarked on a quantitative easing program, snapping up all of Cairo's gold on loan at a high rate of interest. He was a one-man macroeconomic cycle. According to AJH Goodwin, no one else has ever had that kind of individual influence on the eastern Mediterranean economy.

Atahualpa

But what about the Americas? In 1532, a brutal war of succession between half-brothers Atahualpa and Huáscar was just coming to an end, and the Incan Empire was beginning the process of recovery. When dealing with the Incan Empire, issues of economic context are especially hairy. It is the only complex, large-scale civilization ever to develop without any semblance of a market. There was no notion of money at all.

Rather, the entire state was organized as a kind of family unit, with the Inca (the Emperor) controlling everything: food, clothing, luxury goods, houses, and people. As a man, you served the emperor as a farmer, laborer, craftsman, or soldier. In exchange, you were provided with everything you needed to survive. Even wives were considered gifts of the Inca. 

When Spanish conquistadors ambushed Atahualpa at Cajamarca and took him as a prisoner, he was able to muster a ransom like no other, filling a large room with gold. His power was so unquestioned that he could have whole temples stripped of gold, and he did. There was nothing in the empire he did not, in theory, own.

While the figure is largely meaningless in context, the ransom he paid would be worth over $230 million today (based on calculations by John Hemming). The Spanish killed him anyway and gutted his empire, but the billions of dollars' worth of gold and silver that flooded into Europe after 1500 caused high inflation and a prolonged economic slump. Much of the vast sums of gold that sank Europe's economy in the 16th century came from Atahualpa.

The Bottom Line

If you're blown away by the idea that fewer than 100 people control as much wealth as half the world today, imagine how concentrated money used to be. Even if Bill Gates took the most extravagant vacation he could fathom, he probably couldn't cause a regional currency crisis. If somebody were to kidnap a Forbes-list billionaire (it seems a bit rude to use a specific example), would any ransom they could demand send a continent into recession?