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Bid–ask spread
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The bid–ask spread (also bid–offer or bid/ask and buy/sell in the case of a market maker) is the difference between the prices quoted (either by a single market maker or in a limit order book) for an immediate sale (ask) and an immediate purchase (bid) for stocks, futures contracts, options, or currency pairs in some auction scenario. The size of the bid–ask spread in a security is one measure of the liquidity of the market and of the size of the transaction cost.[1] If the spread is 0 then it is a frictionless asset.
Liquidity
[edit]The trader initiating the transaction is said to demand liquidity, and the other party (counterparty) to the transaction supplies liquidity. Liquidity demanders place market orders and liquidity suppliers place limit orders. For a round trip (a purchase and sale together) the liquidity demander pays the spread and the liquidity supplier earns the spread. All limit orders outstanding at a given time (i.e. limit orders that have not been executed) are together called the Limit Order Book. In some markets such as NASDAQ, dealers supply liquidity. However, on most exchanges, such as the Australian Securities Exchange, there are no designated liquidity suppliers, and liquidity is supplied by other traders. On these exchanges, and even on NASDAQ, institutions and individuals can supply liquidity by placing limit orders.
The bid–ask spread is an accepted measure of liquidity costs in exchange traded securities and commodities. On any standardized exchange, two elements comprise almost all of the transaction cost—brokerage fees and bid–ask spreads. Under competitive conditions, the bid–ask spread measures the cost of making transactions without delay. The difference in price paid by an urgent buyer and received by an urgent seller is the liquidity cost. Since brokerage commissions do not vary with the time taken to complete a transaction, differences in bid–ask spread indicate differences in the liquidity cost.[2]
Types of spreads
[edit]Quoted spread
[edit]The simplest type of bid-ask spread is the quoted spread. This spread is taken directly from quotes, that is, posted prices. Using quotes, this spread is the difference between the lowest asking price (the lowest price at which someone will sell) and the highest bid price (the highest price at which someone will buy). This spread is often expressed as a percent of the midpoint, that is, the average between the lowest ask and highest bid: .
Effective spread
[edit]Quoted spreads often over-state the spreads finally paid by traders, due to "price improvement", that is, a dealer offering a better price than the quotes, also known as "trading inside the spread".[3] Effective spreads account for this issue by using trade prices, and are typically defined as: . The effective spread is more difficult to measure than the quoted spread, since one needs to match trades with quotes and account for reporting delays (at least pre-electronic trading). Moreover, this definition embeds the assumption that trades above the midpoint are buys and trades below the midpoint are sales.[4]
Realized spread
[edit]Quoted and effective spreads represent costs incurred by traders. This cost includes both a cost of asymmetric information, that is, a loss to traders that are more informed, as well as a cost of immediacy, that is, a cost for having a trade being executed by an intermediary. The realized spread isolates the cost of immediacy, also known as the "real cost".[5] This spread is defined as: where the subscript k represents the kth trade. The intuition for why this spread measures the cost of immediacy is that, after each trade, the dealer adjusts quotes to reflect the information in the trade (and inventory effects).
Inner price moves are moves of the bid-ask price where the spread has been deducted.
Examples
[edit]Currency spread
[edit]If the current bid price for the EUR/USD currency pair is 1.5760 and the current offer price is 1.5763, this means that currently you can sell the EUR/USD at 1.5760 and buy at 1.5763. The difference between those prices (3 pips) is the spread.
If the USD/JPY currency pair is currently trading at 101.89/101.92, that is another way of saying that the bid for the USD/JPY is 101.89 and the offer is 101.92. This means that currently, holders of USD can sell US$1 for 101.89 JPY and investors who wish to buy dollars can do so at a cost of 101.92 JPY per US$1.
Metals
[edit]Gold and silver are known for having the tightest bid-ask spreads, making them useful as money, while other metals may have wider bid-ask spreads due to lower trading volumes, less liquidity, or large fluctuations in supply and demand. For example, rare metals like platinum, palladium, and rhodium have lower trading volumes compared to gold or silver, which can result in larger bid-ask spreads.
See also
[edit]References
[edit]- ^ "Spreads – definition". Riskglossary.com. Archived from the original on 2012-08-15. Retrieved 2019-04-24.
- ^ Demsetz, H. 1968. "The Cost of Transacting." Quarterly Journal of Economics 82: 33–53 [1] doi:10.2307/1882244 JSTOR 1882244
- ^ Lee, Charles M. C. (July 1993). "Market Integration and Price Execution for NYSE-Listed Securities". The Journal of Finance. 48 (3): 1009–1038. doi:10.2307/2329024. ISSN 0022-1082. JSTOR 2329024.
- ^ Lee, Charles M. C.; Ready, Mark J. (June 1991). "Inferring Trade Direction from Intraday Data". The Journal of Finance. 46 (2): 733. doi:10.2307/2328845. ISSN 0022-1082. JSTOR 2328845.
- ^ Huang, Roger D.; Stoll, Hans R. (July 1996). "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE". Journal of Financial Economics. 41 (3): 313–357. doi:10.1016/0304-405x(95)00867-e. ISSN 0304-405X.
Further reading
[edit]Bid–ask spread
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Fundamentals
Bid and Ask Prices
The bid price represents the highest amount that a prospective buyer is willing to pay for a specified quantity of a financial asset, such as a stock or bond, at any given moment in the trading session.[10] This price reflects the aggregated demand from market participants and serves as the reference point for immediate purchase transactions. Similarly, the ask price, also known as the offer price, denotes the lowest amount that a prospective seller is willing to accept for the same quantity of the asset.[11] It embodies the supply side of the market, indicating the minimum terms under which sellers are prepared to part with their holdings. The terms "bid" and "ask" originated in the era of open outcry trading on exchange floors, where traders physically gathered in pits to negotiate deals through verbal announcements and hand signals; buyers would "bid" by calling out progressively higher prices to attract sellers, while sellers would "ask" for desired prices to solicit buyers.[12] This vocal and gestural system facilitated rapid price discovery in noisy, crowded environments before the widespread adoption of electronic trading in the late 20th century. In modern electronic markets, these concepts persist but are formalized through digital interfaces. In order-driven markets, such as stock exchanges like the Tokyo Stock Exchange or the New York Stock Exchange's electronic systems, bid and ask prices emerge dynamically from the submission of limit orders by traders.[13] A limit order specifies a price at which the trader is willing to buy (for bids) or sell (for asks), and these orders are matched against incoming market orders without intermediary dealers setting fixed quotes. The resulting structure is captured in the order book, an electronic ledger that organizes all outstanding limit orders by price level: the bid side lists buy orders in descending order of price (with the highest price at the top), while the ask side lists sell orders in ascending order (with the lowest price at the top).[14] The top of the book—the best bid (highest buy price) and best ask (lowest sell price)—defines the prevailing market quotes, with deeper layers representing additional queued orders at progressively less favorable prices, providing a snapshot of market depth and potential execution levels.[15]Spread Calculation
The bid–ask spread, also known as the quoted spread, is fundamentally calculated as the difference between the ask price and the bid price.[16] The absolute spread, denoted as , is given by the formula: where is the ask price (the lowest price at which a seller is willing to sell) and is the bid price (the highest price at which a buyer is willing to buy).[17] This measure provides the direct monetary difference in currency units, representing the nominal cost of immediacy for market participants crossing the spread.[5] In contrast, the relative spread normalizes the absolute spread to account for the asset's price level, facilitating comparisons across securities with varying prices.[18] The relative spread, denoted as , is calculated as: where is the midpoint price, defined as .[16] Often expressed as a percentage by multiplying by 100, the relative spread is particularly useful for analyzing liquidity and trading costs across different price ranges or asset classes, while the absolute spread is more relevant for assessing the exact dollar impact in high-value or large-ticket transactions, such as bonds or institutional trades.[19] To illustrate, consider a stock with a bid price of $10.00 and an ask price of $10.05. The absolute spread is computed as dollars. The midpoint price is dollars, so the relative spread is , or approximately 0.50% when expressed as a percentage. These calculations highlight how the absolute spread quantifies the raw gap, while the relative spread scales it proportionally to the asset's value.[17] Bid–ask spreads are further constrained by tick size rules, which impose minimum price increments for quotes and trades. In U.S. equity markets, the standard tick size is $0.01 for most stocks priced above $1.00, meaning spreads must be multiples of this increment and cannot fall below one tick ($0.01).[20] This discretization limits the granularity of possible spread values, potentially binding the minimum spread and influencing quoting behavior, especially for low-priced or highly liquid securities where market makers might otherwise set narrower gaps.[21]Market Significance
Liquidity Indicator
In financial markets, liquidity refers to the ease with which large orders can be executed without causing substantial price movements, reflecting the market's ability to absorb trades efficiently.[22] The bid-ask spread serves as a primary indicator of this liquidity, capturing the transaction costs associated with immediacy in trading. A narrow spread signifies high liquidity, characterized by abundant buyers and sellers, minimal frictions, and competitive quoting that facilitates smooth order execution.[8] Conversely, a wide spread indicates low liquidity, often arising from market stress, sparse participation, or thin order books that amplify the cost of trading.[5] Empirical studies consistently demonstrate an inverse relationship between bid-ask spread width and key liquidity metrics such as trading volume and market depth. Similarly, analyses of U.S. Treasury markets show that narrower spreads correlate with larger quote sizes and higher depth, underscoring the spread's role in signaling overall market resilience.[23] These patterns hold across asset classes, with spreads providing a reliable proxy for liquidity dynamics in real-time trading environments. Within market microstructure theory, the bid-ask spread plays a central role in addressing adverse selection risks faced by market makers, who must quote prices without full knowledge of traders' information. The seminal Glosten-Milgrom model posits that spreads emerge as a compensation mechanism for market makers, widening to account for the probability of trading against informed investors who exploit private information, thereby protecting liquidity providers from losses.[24] This theoretical framework explains how spreads balance the provision of liquidity against the costs of information asymmetry, influencing market efficiency and price discovery. Compared to alternative liquidity measures, such as price impact (which assesses temporary price shifts from order size) or turnover ratios (which track trading activity relative to market capitalization), the bid-ask spread offers advantages in simplicity and immediacy.[22] While price impact captures resilience to large trades and turnover reflects overall activity, spreads directly measure tightness—the cost of small transactions—and are readily observable from quoted prices, making them a practical, low-latency tool for monitoring liquidity without requiring historical data aggregation.[25]Trading Cost Implications
The bid-ask spread represents a primary explicit transaction cost in financial markets, where buyers must purchase securities at the ask price—typically above the perceived fair value, often approximated by the midpoint between bid and ask—and sellers receive the bid price, which is below that fair value.[5] This differential ensures that market makers or liquidity providers are compensated for the risks and costs of facilitating trades, effectively embedding the spread as an unavoidable cost for price takers who execute immediately. Traders typically incur approximately half the spread as a cost per round-trip trade, reflecting the one-way deviation from the midpoint on each leg of the transaction. The expected cost can be expressed as , assuming the midpoint represents the true value and trades occur symmetrically.[26] This cost accumulates with trading frequency, directly reducing net proceeds for investors engaging in frequent buying and selling. The implications of these costs vary significantly between retail and institutional investors. Retail traders, often executing smaller orders without advanced tools, bear a disproportionately higher burden from wide spreads relative to their trade sizes, exacerbating losses in volatile or less liquid markets.[27] In contrast, institutional investors can mitigate impacts through block trades or algorithmic execution, while high-frequency traders minimize costs via superior speed, allowing them to capture rebates or tighten spreads for their own liquidity provision.[28] Persistent wide spreads in illiquid assets further erode long-term portfolio returns by increasing the drag from repeated transactions, as investors must overcome higher hurdles to enter or exit positions without significant price concessions.[29] Empirical evidence shows that such illiquidity premia—where wider spreads correlate with elevated required returns—can diminish realized performance for buy-and-hold strategies in assets like small-cap stocks or certain fixed-income securities.[30] Regulatory measures have aimed to curb these costs by narrowing minimum spreads and promoting alternative venues. The U.S. Securities and Exchange Commission's (SEC) decimalization in 2001 shifted quoting from fractions to pennies, significantly reducing average bid-ask spreads and overall transaction expenses for market participants.[31] Additionally, dark pools—non-displayed trading venues—enable large institutional trades with reduced visible spreads, lowering execution costs and information leakage, though they remain subject to SEC oversight under Regulation ATS to ensure fair access.[32]Spread Variations
Quoted Spread
The quoted bid-ask spread represents the difference between the highest price (best bid) at which a buyer is willing to purchase a security and the lowest price (best ask) at which a seller is willing to sell it, as displayed in the exchange's limit order book.[33] This measure captures the immediate trading cost visible to market participants before any transaction occurs and is calculated simply as the best ask price minus the best bid price.[33] These quotes are sourced directly from exchanges' public order books, where market makers or participants submit limit orders that form the bid and ask sides.[33] The displayed prices update in real time—often multiple times per second in modern systems—as new orders arrive, existing ones are canceled or modified, or trades execute against the book, ensuring the best bid and ask reflect the current market state.[33] One key advantage of the quoted spread is its high transparency, which allows passive investors and analysts to easily monitor liquidity and potential trading costs without needing to execute trades.[33] This observability supports informed decision-making in strategies like index tracking or long-term holding, where real-time visibility into market frictions is valuable.[34] However, the quoted spread has limitations, as it does not account for actual execution prices; large orders can induce market impact by walking the book beyond the best quotes, and hidden or iceberg orders may conceal additional liquidity not shown in the displayed book.[35] Historically, quoted spreads originated in manual floor trading, where specialists or open-outcry traders verbally announced bids and asks on exchange floors like the NYSE, limiting accessibility to end-of-day summaries until the 1980s.[33] The transition to electronic systems accelerated in the U.S. with NASDAQ's introduction of Level 2 quotes in 1983, which disseminated real-time bid and ask prices from multiple market makers via the Nasdaq Quotation Dissemination Service, enabling broader electronic monitoring.[36] By the early 1990s, major exchanges including NYSE and AMEX provided pre-trade quotes electronically, significantly improving data availability and reducing spreads through automation and competition.[33][34]Effective Spread
The effective spread quantifies the actual transaction cost experienced by traders, capturing the difference between the executed trade price and the midpoint of the contemporaneous bid-ask quotes. It serves as a key metric for evaluating execution quality in financial markets. Unlike static measures, it reflects real-world trading dynamics, including any price concessions or deteriorations during execution. The absolute effective spread for a given trade is calculated as , where is the price at which the trade executes and is the midpoint of the quoted bid () and ask () prices at the time of execution.[37] The relative effective spread normalizes this by the midpoint, yielding , expressed as a percentage to facilitate comparisons across assets. To compute it, trade direction is often first determined using methods such as the Lee-Ready algorithm, which classifies trades as buyer-initiated (if exceeds ) or seller-initiated (if below), though the absolute value ensures the measure remains symmetric. This process uses high-frequency quote and trade data to ensure the midpoint is contemporaneous with the execution, typically within seconds. This metric surpasses the quoted spread by incorporating the outcomes of actual executions, thereby accounting for price improvement—when trades occur inside the quoted spread—or slippage when they occur outside due to market movements or negotiation. For example, in a scenario where the midpoint quote is $10.00 and a buy trade executes at $10.03, the absolute effective spread is , or 0.6% relatively, highlighting a modest cost beyond the ideal midpoint.[37] In academic research, the effective spread is a cornerstone for analyzing market liquidity, trading frictions, and microstructure effects, appearing in seminal studies on inventory models and adverse selection. Regulators, including the SEC under Rule 605, mandate its reporting by market centers and broker-dealers to promote transparency in order execution quality and compliance with best execution duties, with monthly disclosures breaking down averages by order size and security type.[38]Realized Spread
The realized spread serves as an ex-post measure of the profitability accrued to market makers or liquidity providers, reflecting the portion of the trading cost that they retain after subsequent price adjustments. It quantifies trade toxicity by isolating the temporary price impact that reverses over time, distinguishing it from permanent price movements driven by information. The relative realized spread is defined by the formula where is the trade direction indicator (+1 for buyer-initiated trades and -1 for seller-initiated trades), is the transaction price at time , is the contemporaneous quote midpoint, and is the quote midpoint periods after the trade, with typically ranging from 5 to 60 minutes depending on the analysis horizon.[39] This measure captures the ex-post value retained by liquidity providers, net of short-term price reversion. In spread decomposition, the effective spread equals the realized spread plus the price impact: where is the effective spread and is the price impact, the latter representing the non-reversing component attributable to adverse selection risks from informed traders.[41] This breakdown highlights how adverse selection erodes market maker revenues, as higher price impact corresponds to greater information asymmetry. In high-frequency trading contexts, realized spreads are analyzed to assess liquidity provision dynamics, where persistently low values signal intensified informed trading that diminishes maker profits through rapid adverse selection.Influencing Factors
Market Conditions
Market conditions play a pivotal role in determining the width of bid-ask spreads, as they influence the level of uncertainty, competition among market participants, and overall trading dynamics. Higher market volatility, often measured by indices like the VIX, tends to widen spreads because it heightens pricing uncertainty and increases the risk for market makers, who demand greater compensation to provide liquidity. For instance, during periods of financial distress, such as market downturns, bid-ask spreads expand in tandem with volatility spikes, reflecting dealers' need to cover potential adverse price movements.[42][43][44] Trading volume exhibits an inverse relationship with spread widths, where elevated volumes facilitate narrower spreads through intensified competition among liquidity providers and reduced information asymmetry. In high-volume environments, frequent transactions allow for more efficient price discovery, enabling market makers to quote tighter spreads without excessive risk exposure. Empirical studies across asset classes, including equities and foreign exchange, confirm that increased trading activity correlates with compressed spreads, underscoring volume's role in enhancing market efficiency.[45][46][47] Intraday time-of-day patterns also systematically affect spreads, with wider gaps typically observed at market open and close compared to midday hours, attributable to elevated information asymmetry and order imbalances during these periods. At the opening, unresolved overnight news leads to cautious quoting, while closing auctions concentrate trading activity, amplifying uncertainty. Research on NYSE stocks reveals a reverse J-shaped intraday spread profile, narrowing progressively after the open before stabilizing, which highlights how temporal trading rhythms modulate liquidity provision.[48][49][50] Major economic events, such as corporate earnings reports or Federal Reserve policy decisions, often cause temporary expansions in spreads due to surges in uncertainty and informed trading. Around earnings announcements, spreads widen briefly as market makers adjust quotes to account for potential surprises in financial disclosures, though the effect is generally short-lived. Similarly, FOMC announcements trigger spread increases amid heightened volatility from anticipated monetary policy shifts, as seen in options markets where liquidity dries up momentarily post-release.[51][52][53] Cross-market structural differences further shape spread behavior, with centralized exchanges generally featuring narrower spreads than decentralized over-the-counter (OTC) markets owing to greater transparency, standardized trading, and competitive quoting mechanisms. In centralized venues like stock exchanges, continuous order matching and regulatory oversight foster tighter liquidity, whereas OTC markets' bilateral negotiations and fragmented dealer networks result in wider spreads to compensate for higher search costs and counterparty risks. This disparity is evident in corporate bonds and derivatives, where exchange-traded instruments exhibit lower effective spreads compared to their OTC counterparts.[54][55][56]Inventory and Information Effects
Market makers face inventory risk when their holdings become unbalanced due to unpredictable order flows, prompting them to widen the bid-ask spread to discourage trades that would exacerbate the imbalance and to cover the costs of holding positions exposed to price fluctuations.[33] This risk arises from the potential for adverse price movements during the time required to offload excess inventory, leading dealers to adjust quotes asymmetrically—lowering bids when long and raising asks when short—to restore balance.[33] Adverse selection occurs when market makers trade against informed investors who possess superior information, necessitating a wider spread to compensate for the expected losses from such transactions. In the Glosten-Milgrom model, the presence of heterogeneously informed traders results in a positive bid-ask spread even for risk-neutral dealers, as the ask price incorporates the expected value conditional on a buy order from an informed trader, and the bid price does the same for a sell order.[24] This mechanism ensures that the spread reflects the probability and magnitude of information-based trading, protecting liquidity providers from systematic losses. Order flow imbalances, characterized by a preponderance of buy or sell orders, induce temporary spread adjustments as market makers skew quotes to manage the resulting inventory pressure. For instance, a surge in buy orders may lead to higher ask prices and wider spreads to slow the inflow, while sell pressure prompts the opposite, with these adjustments persisting until equilibrium is restored through subsequent trades.[46] Information asymmetry models decompose the expected bid-ask spread into components capturing inventory costs and adverse selection, often expressed as , where represents the inventory holding cost related to position risk and denotes the adverse selection premium proportional to the informed trading probability. This additive structure, building on sequential trade frameworks, highlights how spreads equilibrate to cover both sources of dealer risk. Empirical studies indicate that inventory effects dominate spread determination in bond markets, where dealer intermediation and lower information sensitivity amplify holding cost considerations, whereas adverse selection plays a larger role in equity markets due to higher incidences of informed trading. For example, in corporate bond trading, inventory risk accounts for a substantial portion of spreads, reflecting the over-the-counter structure and inventory management challenges, while in NYSE equities, the adverse selection component often comprises 20-40% of the total spread based on trade impact analyses.[56][57]Practical Examples
Foreign Exchange Markets
The foreign exchange (FX) market operates as a decentralized, over-the-counter network that functions continuously across global time zones, enabling 24-hour trading from Monday to Friday. Bid-ask spreads in this market serve as a primary measure of liquidity and transaction costs, often remaining narrow due to the participation of central banks, commercial banks, and institutional investors. Unlike centralized exchanges, FX trading relies on bilateral agreements and electronic platforms, where the spread reflects the dealer's compensation for risk and immediacy.[58] Interbank quoting in the FX market predominantly occurs through specialized electronic platforms such as EBS Market and Refinitiv Matching (formerly Reuters Dealing), which facilitate high-volume, anonymous trading among major liquidity providers. These electronic communication networks (ECNs) have become dominant, shifting the market from fragmented bilateral negotiations to streamlined, order-driven execution that supports rapid price discovery and tight spreads for liquid instruments.[59][60] Typical bid-ask spreads for major currency pairs, such as EUR/USD, range from 1 to 5 pips during standard market hours, driven by robust participation and depth. In contrast, exotic pairs involving emerging market currencies exhibit wider spreads, often exceeding 20 pips, owing to reduced liquidity and higher volatility. For instance, a USD/JPY quote at a bid of 154.00 and an ask of 154.03 yields a 3-pip spread; the relative spread, calculated as the absolute spread divided by the mid-price, approximates 0.02%.[61][62][63] The FX market's exceptional liquidity, with average daily turnover reaching $9.6 trillion in April 2025 according to the Bank for International Settlements (BIS) triennial survey, underpins these narrow spreads for major pairs. However, unique to FX's global structure, spreads can widen significantly during low-overlap hours—such as late Asian sessions or weekends—when trading activity thins and fewer market makers are active, increasing the gap between bid and ask prices.[64][65] Since the early 2000s, the FX market has undergone a profound evolution from voice-brokered deals to algorithmic and electronic trading, which has compressed average bid-ask spreads by more than 50% over the subsequent decade. This transition, accelerated by platforms like EBS and the rise of high-frequency trading, has improved execution speeds and reduced costs, particularly in the spot market, while maintaining the decentralized nature of FX.[66][67]Commodity Markets
In commodity markets, bid-ask spreads reflect the liquidity and volatility inherent to trading physical and futures contracts for metals, energy, and agricultural products. For highly liquid precious metals like gold traded on centralized exchanges such as the COMEX, spreads are typically narrow, ranging from 0.02% to 0.05% relative to the underlying price, due to high trading volumes exceeding 27 million ounces daily.[68] In contrast, base metals like copper or aluminum on the London Metal Exchange (LME) exhibit wider spreads during periods of low inventory or storage disruptions, as reduced availability prompts market makers to increase premiums for risk, sometimes expanding spreads by factors linked to inventory scarcity under the theory of storage.[69][70] Trading venues play a key role in determining spread dynamics, with centralized exchanges like COMEX and LME providing transparent, electronic platforms where quotes are publicly visible and competitively narrowed through order books.[68] Conversely, over-the-counter (OTC) markets for physical commodity delivery often feature wider, less visible spreads due to decentralized dealer networks and bilateral negotiations, which limit price discovery and increase counterparty risk.[71] This venue distinction affects quoting practices, as exchange-traded futures benefit from standardized contracts and real-time matching, while OTC physical trades may incorporate premiums for logistics and quality verification.[54] Unique factors in commodity markets, such as supply shocks from mining strikes, can rapidly widen bid-ask spreads by disrupting immediate availability and heightening uncertainty among traders.[72] For instance, strikes at major producers like those in copper mines have been associated with temporary liquidity squeezes, prompting wider quotes to compensate for potential delivery delays. Additionally, the futures curve's structure—contango, where distant contracts trade at a premium to spot prices, or backwardation, where near-term prices exceed longer-dated ones—influences quoting by signaling storage costs or immediate shortages, leading market makers to adjust bid-ask levels accordingly to hedge roll risks.[73] In backwardation, spreads often narrow slightly during high-volume sessions due to urgent hedging demand, but overall quoting reflects expectations of supply tightness.[74] A representative example from gold futures illustrates these characteristics: on COMEX, a contract might quote a bid of $4,080 per ounce and an ask of $4,082 per ounce, yielding a $2 absolute spread or approximately 0.05% relative, with further intraday narrowing observed during peak U.S. trading hours when volumes surge.[75] Historically, bid-ask spreads in commodity markets have spiked during crises, as seen with silver during the 2008 financial turmoil, where spreads widened significantly—up to several times pre-crisis levels—amid inventory hoarding and panic selling that eroded liquidity across metals exchanges.[43] This event underscored how external shocks amplify spread volatility in tangible assets, distinct from purely financial instruments.[76]Cryptocurrency Markets
In cryptocurrency markets, bid-ask spreads often function as hidden fees, representing the difference between the buying and selling prices on various trading platforms. These spreads serve as an implicit transaction cost to traders, embedded in the quoted prices rather than being charged separately. For example, on platforms like Coinbase, a spread is applied to buy, sell, or convert actions, where the spread is the difference between the price offered to users and the market price obtained by the platform.[77] In sales office or over-the-counter (OTC) trades, particularly in markets like Japan, the spread acts as a hidden cost, where ordering 5000 yen worth of cryptocurrency may yield only about 4800 yen worth due to a typical ~4% spread; this varies with market volatility and results in the buyer receiving less of the asset than the paid amount.[78]References
- https://www.[jstor](/page/JSTOR).org/stable/2962337