Bid–ask spread explained: what it tells you about a market
Learn how to calculate the bid–ask spread, interpret it alongside depth, and distinguish it from fees, slippage, and total trading costs.
The bid–ask spread is the difference between the highest available buying price and the lowest available selling price for an instrument. It shows the gap between the two sides of the market at that moment, for the quantities quoted.
In an order book, the best bid is the highest resting bid and the best ask is the lowest resting ask. Someone who immediately buys from the ask and sells into an unchanged bid crosses that gap. The spread is therefore relevant to execution costs, but it is not the whole cost of trading.
Calculate the spread
Suppose an illustrative market has a best bid of $99 and a best ask of $101. The absolute spread is $2: $101 minus $99. The midpoint is $100: the average of the bid and ask.
A midpoint-based percentage spread is 2%: the $2 gap divided by the $100 midpoint, multiplied by 100. Other displays may use another denominator or report the gap in ticks, so identify the convention before comparing figures.
If one unit can be bought at $101 and immediately sold at $99 with quotes unchanged, the price difference is a $2 loss before fees. The midpoint was not necessarily an available fill price in either direction.
Spread and depth are different
The best prices apply only to the amounts offered there. A small quoted spread can coexist with limited depth. A larger order may reach less favorable levels, producing an average fill farther from the midpoint.
Consider an illustrative book with one unit offered at $101 and another at $103, against a best bid of $99. Buying two units against those unchanged offers gives an average price of $102. The initial $2 top-of-book spread did not describe the execution cost of the whole order.
This assumes the offers remain available. Orders can change before execution, and the book snapshot does not reserve quantities. Read how to read an order book for depth and slippage for changes relative to a reference.
Why spreads can widen or narrow
Quotes reflect participants' willingness to trade, their inventory, uncertainty, and the number of competing offers. During a fast-moving or less active period, participants may offer less size or quote farther apart. Another market may have many competing orders close together.
To compare spreads, use the same instrument, size, and time. A change in one quote is not enough to identify why a participant changed it.
A wider spread also differs from volatility. The spread is a gap between current buying and selling prices; volatility concerns variation over time. They can interact, but a quiet chart does not guarantee a narrow or executable spread.
Spread is not the entire trade cost
Trading fees, funding, slippage, and changes in the market can affect a position's outcome. A spread snapshot cannot summarize all of them. A limit order may avoid crossing immediately but remain unfilled, fill partly, or fill shortly before prices move against it.
For an illustrative immediate round trip, assume entry at $101, exit at $99, and $0.10 in fees on each side. The total loss is $2.20 before any other costs. Those fees are hypothetical and do not represent N1's current schedule.
The all-in cost of a trade covers those interacting costs, while market vs limit orders explains price control and fill uncertainty.
Quoted markets and reference prices
Not every displayed bid or ask is a firm order. In a request-for-quote market, the terms of an executable response for the requested side and size matter. An indicative display and an index level are different from a valid firm quote.
Check whether the market uses a resting order book or RFQ execution. For an RFQ, compare valid quotes for the same trade size and timing; a reference index does not itself supply a bid or ask.
Common questions
Does a narrow spread mean the market is liquid?
It is one signal. Depth, requested size, activity, and how quotes respond to trades also matter. See market liquidity.
Sources
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