Bid-ask spread

The spread is the gap between the best price at which someone is willing to buy a security right now and the best price at which someone is willing to sell it. Both prices sit in the order book: buyers' orders below, sellers' orders above, and between them a gap in which no trades take place. A trade happens when one side accepts the other side's price, crossing that gap.

What makes up the gap

The width of the spread is the reward for whoever keeps orders in the book and commits to trading with anyone who arrives. A resting limit order carries a risk: it gets filled precisely when the price has moved against the person who placed it. The higher the volatility and the less often opposing orders arrive, the wider the gap needed to compensate for that risk. This creates a stable relationship: as liquidity rises, the spread narrows, while in thinly traded securities, ahead of news releases and in the first minutes of the session it widens. Where a security has market maker obligations, the gap is held within contractual limits, and that is exactly what the market maker is paid for by the exchange or the issuer.

The spread is not a single value for the whole day but a property of a specific moment and a specific order size. For the minimum lot the gap may be narrow, but a large order eats through the nearest levels of the book and is filled at a worse price than the best quote. This difference between the expected and the actual entry price already belongs to execution costs, even though it starts with the spread.

Where the gap is narrowest

The tightest spreads are found in the securities with the highest turnover, because there orders are refreshed continuously and the queue on both sides is deep:

What the spread is not

The first confusion is linguistic. In markets, the word "spread" is used for the difference between any two comparable quantities, and most of these spreads have nothing to do with the order book: the G-spread compares a bond's yield with the government bond curve, while a vertical spread is an options structure. The context always makes clear which one is meant, but "the difference between buying and selling" cannot be assumed automatically.

The second concerns trading modes. In the opening and closing auctions there are no two-sided best prices: orders are collected and trades go through at a single clearing price, so at that moment there is no spread at all. And separately: a quote in the form of the last trade price says nothing about the spread, since the last trade could have taken place on either side of the gap.