bid-ask spread

finance

Written byDoug Ashburn

Fact-checked byThe Editors of Encyclopaedia Britannica

A person holds a tablet displaying a trading app with buy and sell buttons, order book, and price chart, with financial graphs on a large screen in the background.

The spread is the market-maker’s edge.

The bid is the highest price a potential investor is willing to pay for a stock, bond, commodity, or other asset. The ask is the lowest price a seller is prepared to accept for the same asset. The difference, or “spread,” between those two is called the bid-ask spread.

When the bid-ask spread is narrow, it may indicate:

Low volatility. When buyers and sellers basically agree on the fair value of a security or asset, the price doesn’t need to move much for a transaction to occur (resulting in low price action).
High liquidity. In the stock market and other high-volume securities markets, market makers use complex algorithms and arbitrage strategies, spread across several trading venues, to keep markets in line. Stocks with high daily trading volume, such as Apple (AAPL) and Tesla (TSLA), have many participants at all times throughout the trading day, so the bid-ask spread is typically just a penny or two.

The wider the bid-ask spread, the more a price might need to move (up or down) to entice a buyer and seller to agree on a transaction. For example, consider home prices. During and after the Great Recession of 2007–09, a glut of home foreclosures created a “buyer’s market,” when the seller of a home needed to reduce the asking price by 10% to 20% or more in order to attract a buyer. In contrast, after the COVID-19 pandemic, a shortage of available homes led to bidding wars, resulting in buyers offering thousands of dollars above the listed asking price.

In the modern stock market, where retail brokerage firms offer zero-commission trading, the bid-ask spread is the cost of buying or selling, and represents payment to the market maker for providing a liquid and orderly market. In the U. S. and some other developed markets, market makers will “rebate” part of their profit margin to the broker in what’s called payment for order flow (PFOF). In other words, crossing the bid-ask spread helps keep the financial markets intact.

This article was most recently revised and updated by Doug Ashburn