Bid-ask spread

The bid-ask spread is the difference between the highest price a buyer is currently willing to pay for an asset, the bid, and the lowest price a seller is currently willing to accept, the ask or offer. It represents the cost of trading immediately rather than waiting for a better price, and it is the compensation market makers earn for standing ready to trade.

It is calculated simply as Ask price - Bid price, and is often expressed relative to price as a percentage or in basis points for comparability across assets. The spread sits at the top of the order book and is one of the clearest, most direct measures of an asset's liquidity: heavily traded assets typically have narrow spreads, while thinly traded ones have wide spreads.

The bid-ask spread is a real, unavoidable transaction cost that transaction cost analysis accounts for alongside market impact and commissions, and it widens during periods of uncertainty or low liquidity, such as around major news or volatility spikes, as market makers demand more compensation for the added risk of holding inventory. A common pitfall is ignoring the spread when comparing a strategy's theoretical returns to what is actually achievable, since crossing the spread on every algorithmic trading order is a real cost a backtest can easily understate.