Bid-Ask Spread
The bid-ask spread is the gap between the best bid and the best offer — the round-trip tax of crossing the book.
Definition
Bid is where a buyer can hit; ask/offer is where a seller can lift. Quoted spread is top of book; effective spread uses the trade price versus midpoint. Spreads compensate market makers for adverse selection and inventory.
Why it matters
It is the first transaction cost. A ‘cheap’ name with a 40bp spread is not cheap at size. TCA starts here.
Case
A small-cap prints a 2% quoted spread that looks 8bp on the tape because prints occur at mid via a dark mid-peg. The displayed spread was not the experience — or the other way around on a stress day.
How to read it
Use effective and realized spread, not only the quote. Size the spread in bps of mid and in dollars per your clip.