Bid-Ask Spread

How a spread is set

In a typical exchange order book, multiple buyers post bids at various prices and multiple sellers post asks. The "best bid" is the highest price someone is willing to pay; the "best ask" is the lowest price someone will accept. The difference between them is the spread.

If Apple stock has a best bid of $190.05 and a best ask of $190.06, the spread is $0.01. To buy immediately you pay $190.06 (the ask). To sell immediately you receive $190.05 (the bid). Trading the round trip — buy and then sell with no price change in between — costs you the spread.

Why spreads exist

The bid-ask spread is the market maker's compensation for providing liquidity. A market maker stands ready to buy at the bid and sell at the ask; they earn the spread when their bid and ask both fill against opposite-side traders. Their risk: while holding inventory between fills, prices can move. The spread exists to compensate for this risk plus operating costs.

In highly liquid markets — Apple, Microsoft, S&P 500 ETFs — competition between market makers drives spreads to a single penny or less. In thinner markets, the spread widens to compensate for higher inventory risk.

What spreads tell you

Spread width is one of the cleanest indicators of liquidity:

• Penny-wide spreads = deep liquidity, low transaction cost, easy to trade large size.
• Wide spreads (1%+ of price) = thin liquidity, expensive to trade in and out, large orders move the price meaningfully.

Small-cap stocks, low-volume options, and obscure bonds often have wide spreads. So do many altcoins on smaller exchanges.

Spreads in different markets

• Equities — typically pennies on liquid stocks; 0.1–1% on small caps; wider on OTC pink-sheet stocks.
• Treasuries — pennies on actively traded recent issues; wider on off-the-run securities.
• Corporate bonds — typically 25–100 basis points (0.25–1.00%); wider for less-liquid issues. Far less transparent than equities.
• Forex — major pairs often have spreads of less than a basis point in interbank markets, scaled up to single-digit pips at retail brokers.
• Crypto — varies enormously. Major pairs on Binance/Coinbase have tight spreads; small-cap tokens on smaller exchanges can have spreads of 1-10%+.

Spread vs. slippage

Spread is the cost of trading at "market" with no size impact. Slippage is the additional cost of moving a large order through multiple price levels. A small order pays the spread; a large order pays the spread plus slippage as it walks the order book.

AMMs like Uniswap don't have an explicit spread the way order-book exchanges do — pricing comes from the constant-product formula. The economic equivalent of the spread is the AMM's swap fee plus the price-impact slippage; users pay roughly the same total cost in different form.