Bid-Ask Spread
Learn how the bid-ask spread measures the immediate gap between buyers and sellers, how to express it in basis points, and why the displayed spread can und
Reading progress — saved on this device
Core concept
The bid-ask spread is the difference between the highest price currently bid by a buyer and the lowest price currently offered by a seller. It is the most visible component of immediate execution cost on an order book.
Absolute spread = best ask − best bid
Spread (bps) = (ask − bid) ÷ midpoint × 10,000
(best bid + best ask) ÷ 2. Quoting spreads in basis points makes liquidity easier to compare across assets with very different nominal prices.How the mechanics fit together
Buyers post bids; sellers post asks.
Highest bid and lowest ask form top of book.
Compensation for inventory, volatility and adverse-selection risk.
Marketable orders cross the spread and may consume deeper levels.
| Condition | Typical effect on spread |
|---|---|
| More competing market makers / deeper liquidity | Usually tighter. |
| Higher volatility or event risk | Usually wider as liquidity providers protect against adverse selection. |
| Thin or fragmented venue | Wider and less stable. |
| Small displayed quantity at best price | Headline spread may look tight while effective spread for a larger order is much wider. |
Evidence to inspect
- Best bid/ask and displayed quantity at those levels.
- Cumulative depth within 5, 10, 25 and 50 basis points of mid for the intended order size.
- Spread distribution through time—not just one screenshot.
- Spread during weekends, announcements and volatility spikes.
- Whether the venue’s quotes are executable, stale, or supported by unusually small orders.
- Cross-venue spreads for the same asset and quote currency.
Practical workflow
- Record the best bid, best ask and midpoint.
- Convert the spread to basis points.
- Check size available at top of book and cumulative depth for your intended notional.
- Estimate expected average execution price, not only the first fill.
- Add explicit fees and likely slippage to create an all-in cost estimate.
- Repeat under different market conditions if the trade is material.
Worked example / thought exercise
Best bid = £99.90; best ask = £100.10. Midpoint = £100.00.
Absolute spread = £0.20. Spread = 0.20 / 100 × 10,000 = 20 bps.
A trader who immediately buys at £100.10 and could immediately sell at £99.90 loses about 20 bps from the spread alone, before fees. But if only £500 is offered at £100.10 and the trader wants £20,000, the effective spread/depth cost can be materially larger.
Which is more decision-relevant for a £20,000 order: the 20-bps top-of-book spread or the executable VWAP across the required depth?
Common mistakes and misunderstandings
Treating the top-of-book spread as the whole cost
The displayed spread applies only to the quantity available at those prices. Larger orders can walk the book.
Comparing absolute spreads across differently priced assets
Use basis points or percentages when comparing liquidity across assets with very different nominal prices.
Ignoring quote size and persistence
A one-unit quote can make the spread look artificially tight. Persistent executable depth matters more.
Assuming spreads are stable
Crypto spreads can widen sharply during volatility, weekends, outages and venue-specific stress.
Knowledge checkpoint
- Bid £24.98, ask £25.02: what is the spread in basis points?
- Why can a 5-bps displayed spread still lead to a 30-bps effective execution cost?
- Which two measurements would you pair with spread before executing a large market order?
FAQs
❓ Is the bid-ask spread a fee charged by the exchange?
No. It is a market-structure cost created by the gap between resting buy and sell prices. Explicit maker/taker fees are separate.
❓ Why do spreads widen during volatility?
Liquidity providers face greater inventory and adverse-selection risk, so they often quote less size and require a wider price cushion.
❓ Can a limit order avoid the spread?
A resting limit order can add liquidity rather than cross the spread, but it introduces fill risk and may be adversely selected if the market moves.
❓ What is an effective spread?
It measures execution relative to a reference such as the midpoint and can better reflect the actual cost than the displayed top-of-book spread.
📋 Summary
The bid-ask spread is the immediate gap between the best bid and ask, best compared in basis points. It is a useful first liquidity measure but not a complete execution-cost estimate. Combine it with quote size, order-book depth, fees and expected slippage.
Want this in a personalised order?
Take the crypto assessment and get a custom path of 10 modules matched to what you already know. Free, no card required.
Build my path →