Bid-Ask Spread

Context & Mechanics

Definition

In every order book two sides face each other: the bid – the highest price a buyer currently pays – and the ask (also offer) – the lowest price at which a seller gives up. The difference is the bid-ask spread. If a stock quotes 49.98 to 50.02, the spread is 0.04 or 0.08%. A market order buys at the ask and sells at the bid – the spread is thus the amount an immediate round trip costs, before any commission.

What drives spread width

Liquidity: the more participants and volume, the tighter the spread – large indices and forex majors often trade at fractions of a basis point, small caps at one percent and more. Volatility: in news phases market makers widen spreads because their inventory risk rises – around data releases the spread can multiply. Trading time: outside the main session (pre-/after-market, forex rollover) liquidity thins out and spreads widen systematically.

The spread as a cost factor

For position traders with large targets the spread is a rounding error; for high-frequency styles it is the dominant cost. A scalper with 10-cent targets loses 40% of gross profit per trade at a 4-cent spread – the same strategy can be profitable in a tight market and structurally losing in a wide one. The spread therefore belongs in every backtesting calculation and in the choice of instrument. Limit orders partly avoid the spread because they can be placed inside the range – paid for with execution uncertainty.

Why it matters for traders

The spread is a market's most honest liquidity gauge and the base fee of every strategy. Knowing one's average trade size allows calculating what share of expected profit the spread consumes. In the GlanWick simulator spread costs flow into trade evaluation by way of example – GlanWick is a training and simulation tool and not a prop firm itself.

Execution Example

A stock quotes $49.98 (bid) to $50.02 (ask). A trader ($100,000 account) buys 2,000 shares via market order and compares the spread costs with the setup: scalp with a $0.10 target versus swing with a $2 target.

Spread: 50.02 − 49.98 = $0.04 (0.08%). The buy fills at the ask: 2,000 × 50.02 = $100,040.
Immediate round trip: sale at the bid $49.98 → loss 2,000 × 0.04 = $80 – the pure spread fee without the market having moved.
Scalp calculation: target +$0.10 → gross profit $200, of which $80 spread = 40% cost ratio. The strategy needs a very high hit rate to carry that.
Swing calculation: target +$2.00 → gross profit $4,000, spread share 2% – negligible. Same spread, completely different relevance: holding period determines how heavily the spread weighs.

Execution Risk & Errors

Ignoring spread costs in backtests and trade planning

Trading scalping strategies in instruments with wide spreads

Using market orders in news phases or outside the main session when spreads are widened

Calculating the mid-price as achievable although market orders fill at bid/ask

Confusing spread and commission and underestimating total costs

Frequently Asked

Who earns the bid-ask spread?

Primarily market makers: they permanently quote bid and ask and collect the difference as compensation for liquidity and inventory risk. With some brokers the spread is also the fee model.

Why do spreads widen on news?

Because liquidity providers' risk rises: price jumps can devalue their inventory. They protect themselves with wider ranges – trading costs rise exactly when many want to trade.

How can I reduce spread costs?

Choose liquid instruments and main trading hours, place limit orders inside the range and calibrate strategies so the price target is a multiple of the spread.

What does the spread say about a market?

It is a direct liquidity measure: tight spreads = many active participants and low immediacy costs; wide spreads = thin book, higher costs and greater slippage risk.