Bid-Ask Spread

The SEC's own explanation of the spread, written for securities that trade over the counter, describes the same two prices from the point of view of a market maker. The bid is the highest price a market maker will pay at any given time to purchase a specified number of shares, and the ask, also called the offer, is the lowest price at which a market maker will sell the stock. The SEC adds that market makers make their money on the spread.

Both descriptions point to the same practical fact. A buyer who wants to trade right away deals at the ask, and a seller who wants to trade right away deals at the bid. Neither can trade right away at the other side's price, so the spread is the amount that separates what an eager buyer pays from what an eager seller receives.

How the Spread Is Measured

The simplest measure is the absolute spread, which is the ask price minus the bid price. A quote of twenty-five dollars and forty cents bid and twenty-five dollars and forty-three cents ask has an absolute spread of three cents.

An absolute spread does not by itself say whether a spread is large or small, because a three cent gap means different things for stocks at different prices. For that reason the spread is often expressed as a percentage of the price. One common way to do this is to divide the absolute spread by the midpoint, which is the price halfway between the bid and the ask. In the example above the midpoint is twenty-five dollars and forty-one and a half cents, and the spread is about 0.12 percent of that midpoint.

Analysts also distinguish between the quoted spread and the effective spread. The quoted spread is the gap between the bid and the ask that is displayed. The effective spread compares the price at which an order was actually executed with the midpoint at the time the order arrived, so it reflects what a particular order really paid, including any improvement over the quote. The quoted spread describes the market and the effective spread describes a trade.

A Worked Example

Consider a hypothetical stock quoted at twenty-five dollars and forty cents bid and twenty-five dollars and forty-three cents ask. An investor places a market order to buy one hundred shares. The order is filled at the ask of twenty-five dollars and forty-three cents. If the investor changes their mind and immediately places a market order to sell the same one hundred shares, and the quote has not moved, the sale is filled at the bid of twenty-five dollars and forty cents. The investor has lost three cents per share, or three dollars in total, before any commission, without the market price changing at all.

Now consider a second hypothetical stock quoted at ten dollars bid and ten dollars and thirty cents ask. The absolute spread is thirty cents. The midpoint is ten dollars and fifteen cents, so the spread is about 2.96 percent of the midpoint. A round trip of one hundred shares at the displayed quotes costs thirty dollars. The second stock's spread is ten times larger in cents and roughly twenty-five times larger as a share of the price. Both examples are illustrations only and do not describe any actual securities.

The comparison shows why the percentage form matters. A one-cent spread on a low-priced stock can be proportionally larger than a three-cent spread on a high-priced stock, so comparing spreads in cents alone can mislead.

Why the Spread Exists

A market in which every buyer and seller had to wait for a matching order from the other side would be slow. A market maker is a firm that stands ready to buy and to sell, so that an investor can trade without waiting. In the SEC's description, a market maker has both a price at which it will buy and a price at which it will sell, and market makers make their money on the spread. The spread is the margin between the two prices at which the market maker is willing to deal.

The SEC's staff has described the spread in similar terms in a background paper on thinly traded securities. The paper explains that the bid-ask spread reflects an equilibrium point at which a liquidity provider finds a positive rate of return, and that wider spreads in thinly traded stocks reflect the risks and costs associated with providing liquidity in those stocks. A firm that quotes both sides takes on the possibility that the market will move against it before it can close out a position, and the spread is part of what compensates it for taking on that possibility.

The firms that quote prices are not the only source of narrow spreads. When investors place limit orders that are displayed in the market, those orders become part of the quote. A buyer's limit order can become the bid and a seller's limit order can become the ask. The spread is therefore the gap between the best displayed buying interest and the best displayed selling interest, whoever supplies it.

What Makes the Spread Wider or Narrower

The most consistent pattern is that liquid securities have narrower spreads than thinly traded ones. The SEC staff paper on thinly traded securities reported that quoted spreads, which it defined as the difference between bid and offer prices, and relative quoted spreads were greater for securities with an average daily trading volume under one hundred thousand shares. The same paper observed that a lack of depth suggests that it will likely be more expensive for an investor to transact in larger size in those securities.

The same pattern appears in exchange-traded funds. The SEC's investor bulletin on exchange-traded funds explains that an exchange-traded fund and other securities that trade on a securities market have two market prices, the bid price and the ask price, and that the difference between them is called the spread. It states that exchange-traded funds that are more liquid and have higher trading volume typically have tighter or smaller spreads.

Depth is a second consideration. The spread describes the gap at the best prices, but the amount available at those prices is limited. A large order may need to be filled at several prices, and the SEC staff paper's observation about the expense of transacting in larger size reflects this. A tight quoted spread for a small quantity does not guarantee that a large quantity can be traded at the same prices.

Time matters too. A spread is a snapshot. The bid and ask change as orders are placed, executed and cancelled, so the spread an investor sees a moment before placing an order may not be the spread that applies when the order reaches the market. FINRA's investor education material makes a related point about market orders, warning that an investor might not get the price they saw or were originally quoted, especially in fast-moving markets.

The Spread as a Cost of Trading

The SEC's investor bulletin on exchange-traded funds states that the spread can be thought of as a hidden cost to investors since spreads reduce potential returns. The word hidden is apt because the spread does not appear as a line item on an account statement. It shows up as the difference between the price at which a position could be bought and the price at which it could be sold.

The same bulletin separates the spread from commissions. It states that, in addition to fund fees, an investor may pay brokerage commissions and additional trading costs when buying and selling shares. A trade can therefore carry a commission, a spread, or both, and the two are not the same charge. Because the spread is paid when an investor trades, an investor who trades often pays it often.

The spread is also relevant to how long an investor expects to hold a position. A holder who buys and keeps a security for many years pays the spread once on the way in and once on the way out. A holder who trades repeatedly pays it on each round trip. The spread does not by itself tell an investor whether to trade, but it is a number worth knowing before doing so.

Orders and the Spread

The type of order an investor uses determines how the spread affects the trade. FINRA's investor education material explains that a market order is the most common type of investor order and generally will execute at or near the current bid or ask prices in the marketplace during normal trading hours. A buy market order is generally filled at or near the ask, and a sell market order is generally filled at or near the bid. A market order gives priority to speed, and the spread is the price of that speed.

FINRA explains that a limit order is an order to buy or sell a security at or better than a specified price, and that a buy limit order can be executed only at or below the limit price while a sell limit order can be executed only at or above the limit price. A limit order gives the investor control over price, but it does not guarantee that the order will be filled.

A limit order can be placed inside the spread. Return to the first hypothetical stock quoted at twenty-five dollars and forty cents bid and twenty-five dollars and forty-three cents ask. A buy limit order at twenty-five dollars and forty-one cents is below the ask, so it would not be filled immediately against the current ask. If it is displayed, it can become the new best bid, and the quoted spread would narrow to two cents. A market sell order that arrived next would then be filled at twenty-five dollars and forty-one cents instead of twenty-five dollars and forty cents. This is an illustration only. In practice, whether an order is displayed and how it is matched depends on the venue and the order's instructions.

The choice between the two order types is a trade-off. An investor who uses a market order accepts the spread in exchange for a prompt execution. An investor who uses a limit order may avoid some or all of the spread but accepts the possibility that the order will not execute.

The Minimum Price Increment and the Spread

The spread cannot be smaller than the smallest price step that the market allows. SEC Rule 612 of Regulation NMS addresses that step, which is known as the minimum pricing increment. The SEC's staff explains that the rule prohibits market participants from displaying, ranking or accepting quotations, orders or indications of interest in any NMS stock priced in an increment smaller than one cent, unless the quotation, order or indication of interest is priced at less than one dollar per share, in which case the minimum pricing increment is one hundredth of one cent.

For a stock priced at or above one dollar, therefore, the smallest gap between a displayed bid and a different displayed ask is one cent.

In September 2024 the SEC adopted amendments to Rule 612. The SEC's fact sheet describes the amended tiers this way: under the amended rule a stock whose time weighted average quoted spread is fifteen thousandths of one dollar or less would be quoted in a half-cent increment, while stocks with a wider spread would keep the one-cent increment. The original compliance date was the first business day of November 2025. The SEC has since granted exemptive relief delaying compliance, and an order dated June 11, 2026 extends that relief until the first business day of November 2027. The current requirement therefore remains the existing one-cent increment for stocks at or above one dollar, and a reader should check the SEC's current position, because the compliance date has been moved more than once.

The significance for the spread is straightforward. The smaller the allowed increment, the narrower the quoted spread can become for the most actively traded stocks. The increment is a floor, and the actual spread in any stock is determined by the orders and quotes that investors and market makers place at or above that floor.

FINRA Rules That Bear on the Spread

The spread is a feature of the market and not a charge set by a rule, but several FINRA rules govern how firms behave when they quote at the spread, trade against it, or send orders to be filled at it.

FINRA Rule 5220, titled Offers at Stated Prices, provides that no member shall make an offer to buy from or sell to any person any security at a stated price unless the member is prepared to purchase or sell, as the case may be, at that price and under the conditions stated at the time of the offer. A bid and an ask published by a market maker are offers at stated prices, so the firm that publishes them must stand behind them.

FINRA Rule 5310, titled Best Execution and Interpositioning, provides in paragraph (a)(1) that, in any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in that market so that the resulting price to the customer is as favorable as possible under prevailing market conditions. The spread bears on that standard because the price a customer receives depends on where in the spread an order is executed. The rule lists factors that bear on reasonable diligence, including the character of the market for the security, the size and type of transaction, the number of markets checked, the accessibility of quotations, and the terms and conditions of the order.

FINRA Rule 2121, titled Fair Prices and Commissions, provides in its opening sentence that, in securities transactions, whether in listed or unlisted securities, if a member buys for its own account from its customer, or sells for its own account to its customer, it shall buy or sell at a price that is fair, taking into consideration all relevant circumstances, including market conditions with respect to the security at the time of the transaction, the expense involved, and the fact that the member is entitled to a profit. The rule lists market conditions at the time of the transaction among the circumstances to consider, and its test is the fairness of the price charged to the customer in light of all relevant circumstances. It is not a limit on the width of a quoted spread.

The Term in Exam Preparation

FINRA's content outline for the Securities Industry Essentials examination lists bid-ask among its topics. A learner preparing for that examination can review the course overview for the Securities Industry Essentials examination to see how the topic fits with the rest of the content outline.

Common Misunderstandings

One misunderstanding is that the spread is a fee that a brokerage firm charges. The spread is the difference between the bid and the ask in the market. A firm may also charge commissions or other fees, and the SEC's investor bulletin treats those as separate from the spread.

A second misunderstanding is that a narrow spread means a security is safe. A narrow spread describes how close the best buying and selling prices are at a moment in time and generally signals that a security is easy to trade. It says nothing about whether the security's price may fall.

A third misunderstanding is that the last price at which a stock traded is the price at which an investor can trade now. An investor who wants to buy immediately deals at or near the ask and an investor who wants to sell immediately deals at or near the bid, and FINRA warns that an investor might not get the price they saw, especially in fast-moving markets.

A fourth misunderstanding is that a spread measured in cents can be compared directly across stocks. A spread of a few cents is a small part of a high price and a larger part of a low price, which is why the percentage form is often used.

A fifth misunderstanding is that the spread only matters to short-term traders. Every purchase and every sale is made at or near the ask or the bid, so the spread affects anyone who buys or sells, though an investor who trades less often pays it less often.

A sixth misunderstanding is that a trade without a commission has no cost. The spread remains. The SEC's investor bulletin describes it as a hidden cost that reduces potential returns.

Key Points

The bid-ask spread is the difference between the highest price a buyer will pay and the lowest price a seller will accept at a given time. The SEC describes the bid as the highest price a buyer will pay and the ask as the lowest price at which a seller will sell, and the spread as the difference between them.

The spread can be expressed in cents or as a percentage of the midpoint. A percentage is more useful for comparing stocks at different prices, and the effective spread describes what an executed order actually paid.

Market makers make their money on the spread, and wider spreads in thinly traded securities reflect the risks and costs of providing liquidity. More liquid securities, including exchange-traded funds with higher trading volume, typically have tighter spreads.

The spread is a cost of trading that is separate from commissions. Market orders generally execute at or near the bid or ask, while limit orders can be placed inside the spread but may not be filled.

SEC Rule 612 sets the minimum pricing increment, which limits how narrow a displayed spread can be. FINRA Rules 5220, 5310 and 2121 govern firm quotations, best execution and fair prices to customers, and FINRA's content outline for the Securities Industry Essentials examination lists bid-ask as a topic.