Quick definition The realized spread is the price change experienced by a market maker between buying and selling. It measures the true profit (or loss) from providing liquidity, accounting for market moves. What it is Suppose a market maker buys at 100.00 and sells at 100.02 (spread of 0.02). But the market moves and they sell later at 100.01. Their realised spread is 0.01 (100.01 - 100.00). Realized spread can be negative if the market moves against the market maker. They buy at 100.00, prices fall to 99.99, and they sell at 99.99. Realized spread is -0.01. Why it matters Realized spread measures the true profitability of market making. High adverse selection reduces realized spreads (prices move against the market maker). Realized spread is a key metric for evaluating market maker performance. Bid-ask spread versus realized spread Quoted spread (bid-ask spread) is what you see: 100.50 bid, 100.51 ask, spread of 0.01. Realized spread is what the market maker actually earns after prices move. It accounts for adverse selection. If prices move against the market maker, realized spread is less than quoted spread. Practical example A market maker quotes bid 100.50, ask 100.51 (quoted spread 0.01). They fill a buy at the ask (100.51) and a sell at the bid (100.50), earning the quoted spread. But between these trades, prices moved up to 100.52. They bought at 100.51 and prices went to 100.52, so they would have been profitable if they had held. The realized spread accounts for this: they earned the quoted spread but could have done better. Measurement Realized spread is calculated by looking at the market maker's trades and the prices after execution. Academic papers use high-frequency data to measure it precisely. See also - Bid-Ask Spread - Effective Spread - Market Maker Profit - Adverse Selection
