Glossary · Market Structure
Bid-Ask Spread
Also: spread, bid-offer spread
Published
Bid-Ask Spread — The bid-ask spread is the difference between the highest price a buyer will pay (the bid) and the lowest price a seller will accept (the ask or offer) for an asset at a given moment. It is the visible cost of immediacy and the primary revenue of a market maker, usually expressed in basis points of the mid-price.
What the Spread Pays For
A market maker earns the spread for taking on inventory it did not choose and for the risk that prices move before it can offset that inventory. Wider spreads appear when volatility rises, when depth is thin, or when the market maker suspects that incoming orders are informed. Tighter spreads appear where many market makers compete on a deep book.
Quoted Versus Effective Spread
The quoted spread applies to the displayed quantity at the top of the book. The effective spread for a larger order is wider, because the order consumes deeper levels. For institutional size, the relevant number is the effective spread or, for a block, the spread embedded in a request-for-quote price, which covers the whole quantity at once.
Reading a Quote
A quote that is tight for a small size and wide for a large size is a normal shape for an order book. When comparing liquidity providers, a desk compares spreads at the sizes it actually trades, on the settlement terms it actually uses.