The bid-ask spread is the difference between the highest price a buyer is currently willing to pay and the lowest price a seller is currently willing to accept. It is one of the most basic transaction costs a trader faces.
Key takeaways
- The bid is the best displayed buying price and the ask is the best displayed selling price.
- The spread is ask minus bid.
- Tighter spreads are often associated with deeper liquidity and active trading.
- Spreads can widen during volatile news, quiet sessions or market stress.
- For very short-term trading, even a small spread can materially affect results.
A simple spread example
If a market shows a bid of 100.00 and an ask of 100.05, the spread is 0.05. A trader buying immediately with a marketable order generally interacts with the ask, while an immediate seller interacts with the bid.
Why does a spread exist?
Buyers want lower prices and sellers want higher prices. Market makers and other participants quote both sides while taking inventory and execution risk. The gap between the best bid and ask reflects part of the cost and risk of providing liquidity.
What makes spreads wider?
Spreads can widen when volatility rises, when fewer participants are active or when uncertainty increases. Major economic releases, overnight sessions and unexpected headlines can all change quoting behavior.
A market can normally be highly liquid and still experience a temporary spread expansion during stress.
Spread vs commission
A spread is embedded in the difference between buy and sell quotes. A commission is a separate fee charged by a broker or venue. Depending on the account structure, a trader may pay one, the other, or both.
Spread vs slippage
The spread exists before execution. Slippage is the difference between the expected execution price and the actual fill. During fast conditions, a trader can cross a wide spread and still experience additional slippage.
Why does spread matter more to scalpers?
A trader targeting a very small price move gives transaction costs a larger share of the potential outcome. If the target is only a few units away, a one-unit increase in total execution cost matters more than it would on a much larger move.
This is why historical strategy results that ignore spreads can look much better than realistic live execution.
How do order types affect the spread?
A market order generally crosses available liquidity to seek immediate execution. A limit order can rest at a chosen price and potentially avoid crossing the full spread, but there is no guarantee it will execute.
Why session timing matters
Liquidity changes throughout the day. Markets often become more active when their primary trading centers are open. Around transitions, holidays or thin overnight periods, spreads can behave differently from the conditions a trader sees during peak participation.
Bottom line
The bid-ask spread is small enough to be ignored by beginners and important enough to change real trading results. It should be included whenever execution quality or historical performance is evaluated.
Continue with What Is Liquidity? and What Is Slippage?.
This article is educational only and is not financial advice.