Spreads
Family IV · Costs
Not to be confused with spread, spread cost.
Spreads are the gap between the highest price a buyer is willing to pay (the bid) and the lowest price a seller will accept (the ask). They are a cost because a position must typically overcome this gap before it breaks even. Spreads are quoted in price terms or in pips and are not fixed; they widen or narrow with liquidity, volatility and venue rules.
How a spread is quoted and paid
A spread can be expressed in price units, in pips, or as a percentage of the mid price. For a stock quoted 100.05 bid / 100.07 ask, the spread is 0.02. For an FX pair quoted 1.1050 bid / 1.1052 ask, the spread is 2 pips. The cost is paid implicitly: a buyer enters at the ask and a seller exits at the bid, so the spread is realised on entry and exit rather than charged as a separate fee.
Some instruments are quoted with a fixed spread under normal conditions, while others are quoted with variable spreads that change continuously. The quoted spread is not always the spread actually available for a given order size, because larger orders may consume multiple price levels.
Worked example
What makes spreads change
Spreads are not constant. They typically widen when liquidity is thin, when volatility rises, around scheduled news releases, and outside the main trading hours of the instrument. They can also widen when a venue applies a wider quote for a particular order size or when a market maker withdraws quotes.
Regulatory and venue rules affect how spreads are displayed and what counts as the best available price. Some jurisdictions require firms to show the spread on a client statement, while others do not. The exact treatment varies by regulator and by broker, so no single figure applies universally.
Spread versus other costs
The spread is one component of total transaction cost. It is distinct from commission, which is an explicit charge, and from slippage, which is the difference between the expected price and the actual execution price. A narrow quoted spread does not guarantee a low total cost if commission or slippage is high.
For instruments traded on an order book, the spread is the difference between the best bid and best ask. For instruments quoted by a dealer, the spread is the difference between the dealer's buy and sell prices. The visible sign that identifies a spread is the two-sided quote: a lower bid and a higher ask.
Often confused with
- spread
- The spread is the difference between the bid price and the ask price of a financial instrument, representing the primary transaction cost in most markets.
- spread cost
- Spread cost is the amount a trader implicitly pays when buying at the ask and selling at the bid, equal to the difference between those two prices multiplied by the position size.