Notices

Spread

From Traderpedia

(Redirected from Bid-ask spread)
Definition:
The difference between the bid and the ask price.


The spread is a major component of the costs of trading.

  • Example:
       1120.50
       1120.25 < Ask
 Bid > 1120.00
       1119.75

The difference between the bid and the ask in this example is a spread of 0.25 of a full market point, in the emini S&P future this would make the spread worth $12.50. Not all markets are "tight" to the bid/ask and the nearest marketable prices could be several ticks apart.

New traders seldom consider the spread as a cost of trading, but instead seem to focus on the cost of their commissions - the spread however is a very real cost of trading because if you need to enter or exit a trade quickly using a market order you can only hit the nearest bid or offer - if the last traded price in the example above were 1120.25 and you placed a sell market order, you would be "paying the spread" to get out at the market price which would be 1120.00 - the difference between the bid or the ask comes off your profits or is added to your losses in any particular trade.

In spread betting, the spread is quoted by the bookmaker and may differ significantly from what the underlying market stands at - for example, Finspreads are today quoting the S&P future with a spread of 1.00 - a full market point worth of spread - all of which goes into the spread betting firms pocket.

  • Note: The bid/ask "spread" as detailed above differs from spread trading which is a particular trading technique and should not be confused with the spread.