Bid-Ask Spread

The bid-ask spread is the difference between the bid price, the highest price a buyer is currently willing to pay, and the ask price, the lowest price a seller is willing to accept. It is one of the most basic measures of how easy and costly it is to trade an asset. A narrow spread signals an active, liquid market; a wide spread signals that trading is thin, risky or expensive.

Spreads exist in every quoted market, including shares, bonds, currencies, commodities, derivatives and cryptocurrencies. They compensate market makers and other liquidity providers for standing ready to buy and sell, and they are an implicit cost to anyone who buys and then sells. The spread is one of several types covered in the general entry spread, and in foreign exchange it is discussed further under FX spread.

Think of a currency exchange booth at an airport. It might buy euros from you at $1.05 and sell euros to you at $1.15. If you swapped dollars for euros and then immediately changed your mind and swapped back, you would lose 10 cents on every euro without the exchange rate moving at all. That gap is the booth's spread, and it is how the booth makes money.

Every market has a booth like this, even if it is a screen rather than a counter. The closer the buying and selling prices, the cheaper it is to trade. Popular assets with many buyers and sellers usually have tiny spreads, while obscure ones can have very wide gaps between what you can buy and sell for.

The spread in price terms is:

To compare assets with different prices, it is often expressed as a percentage of the midpoint:

Suppose a share has a bid of $49.95 and an ask of $50.05. The spread is $50.05 - 49.95 = 0.10$, or 10 cents. The midpoint is $(50.05 + 49.95) \div 2 = 50.00$, so the percentage spread is $0.10 \div 50.00 \times 100 = 0.2\%$. An investor who buys 1,000 shares at the ask and sells them straight back at the bid loses $100, the round-trip cost of crossing the spread, before any commission.

Several factors determine how wide a spread is:

• Trading volume. Heavily traded assets attract many competing buyers and sellers, pushing spreads down.
• Volatility. When prices swing widely, liquidity providers face more risk of loss and widen their quotes; spreads therefore rise in turbulent markets, linking them to volatility.
• Information risk. Market makers widen spreads when they fear trading against better-informed parties, a cost related to asymmetric information.
• Inventory and funding costs. Dealers holding unwanted positions, or paying more to fund them, charge more.
• Market structure. Competition between venues, tick sizes set by exchanges and the presence of high-frequency traders all influence spreads.
• Trading hours. Spreads are often wider at the open, the close and outside main trading sessions.

On major centralized exchanges, spreads for bitcoin and ether against the dollar or stablecoins are often a small fraction of a percent, reflecting deep order books. Smaller tokens, especially those with low liquidity, can have spreads of several percent. On decentralized exchanges using automated market makers, there is no posted spread; the cost of trading shows up as a pool fee plus price impact, which grows with the size of the trade relative to the pool. Broker-style crypto apps that advertise "zero commission" often earn revenue by quoting a wider spread than the underlying market, so the effective cost may be higher than it looks.

For investors, the spread is a direct trading cost that can outweigh commissions, especially for frequent traders and in less liquid assets. Fund managers measure it as part of transaction cost analysis. For regulators and researchers, spreads are a gauge of market quality: they widened sharply during the 2008 financial crisis and in March 2020, signalling stress. Rules on best execution require brokers in many jurisdictions to seek favourable prices for clients, taking spreads into account. Investors can manage spread costs by trading liquid assets, using limit orders rather than market orders, avoiding illiquid trading hours and comparing quotes from several venues.

The quoted spread at the top of the book applies only to the size shown at those prices. Large orders may move through several price levels, so the effective cost is higher than the headline spread. Some trades are executed inside the spread through price improvement or dark pools, making the quoted figure an overestimate. Spreads also change from second to second, so a single snapshot can mislead. For these reasons, analysts often use measures such as the effective spread, based on actual trade prices, alongside the quoted spread.