Microstructure · Core
Effective Spread
Effective spread is twice the signed distance from the trade price to the prevailing midpoint, the realized cost of crossing versus posting.
Definition
Effective spread ≈ 2 q (p − m), where q is +1 for a buy, p is the fill, and m is the midpoint at the decision or trade time. Realized spread subtracts subsequent mid move (adverse selection).
Why it matters
Quoted spread is advertising. Effective spread is what you paid. The gap is hidden liquidity, price improvement, and mid-point games.
Case
A retail fill inside the NBBO can show a negative effective spread (price improvement) while the wholesaler still earns on the average book.
How to read it
Always name the mid timestamp. Decision-time vs trade-time mid changes the number enough to invert a venue ranking.