Quick definition 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). It is the immediate cost of crossing the market. What it is At any moment, the order book shows two prices: the best bid and the best ask. The spread is the gap between them. If Apple is trading with a bid of 150.42 and an ask of 150.44, the spread is 0.02 dollars. The spread is the profit market makers earn by buying at the bid and selling at the ask. It compensates them for the risk of holding inventory and the possibility of being adversely selected by a more informed trader. Why it matters The spread is the largest transaction cost for most traders. On a round-trip trade (buy then sell), the spread is paid twice. A spread of 0.02 dollars costs 0.04 dollars total per share. For algorithmic trading, spread compression is critical; a strategy earning 0.5 basis points becomes unprofitable if spreads are 1 basis point wide. Spread versus Slippage Slippage is the difference between your expected price and your actual fill price. The spread contributes to slippage, but so does market movement between order submission and execution. Practical example You want to buy 1,000 shares of Tesla. The current spread is: - Bid: 245.31 (from NYSE) - Ask: 245.32 (from NASDAQ) - Spread: 0.01 dollars (4 basis points) You buy at the ask for 245.32, costing 245,320 dollars. An hour later, you want to sell. The market has moved. The bid is now 245.30, the ask is 245.31. You sell at the bid for 245,300 dollars. Your round-trip loss from the spread is 20 dollars. Spreads across venues Spreads tighten during high-volume hours and widen during low-volume or volatile periods. Venues with deep liquidity (NYSE, NASDAQ) have narrower spreads than smaller exchanges. Spreads are also constrained by tick size; on US equities, the minimum price increment is 0.01 dollars, which sets a floor on how narrow the spread can be. See also - Best Bid-Offer (BBO) - Market Impact - Liquidity - Order Book
