Definition
Bid-Ask Spread
The bid-ask spread is the difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask), representing a core implicit cost of trading and a measure of liquidity.
On Indian exchanges, liquid Nifty 50 stocks trade at spreads of a tick or two, while illiquid small-caps and some ETFs show much wider spreads. The spread is the immediate cost a market-order trader pays to cross from bid to ask, and it is a key input to slippage modelling.
Market makers earn the spread for providing liquidity and managing inventory and adverse-selection risk. For ETFs, a tight spread alongside a small premium/discount to NAV signals a healthy creation/redemption arbitrage and good ETF market maker activity.
Related terms
- SlippageSlippage is the difference between the expected price of a trade and the price at which it is actually executed, arising from market movement, spread and limited liquidity between order placement and fill.
- Market Making (Algorithmic)Algorithmic market making is the automated, continuous posting of buy and sell quotes for a security to provide liquidity, earning the bid-ask spread while managing inventory and adverse-selection risk.
- ETF Market MakerAn ETF market maker is a registered participant that continuously posts buy and sell quotes for ETF units on the exchange, providing on-screen liquidity and keeping the traded price close to fair value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.