Mispricing
Mispricing is the gap between market price and an estimated fair price. A mispricing is only actionable if it exceeds trading costs and uncertainty.
Definition
Mispricing is the difference between the current market price and an estimated fair price.
When it matters
A mispricing becomes tradable only when it is large enough to overcome execution costs and uncertainty.
Cost threshold
• If your expected edge is smaller than the spread plus slippage and fees, the trade can be negative even if your direction is right.
• Measuring effective spread helps quantify the execution cost component of that threshold.
Common pitfalls
Chasing tiny edges: In bounded price markets (0 to 100), small edges disappear quickly after costs.
Using last price: Always assess current bid and ask before declaring a mispricing.