Bid-ask spreads: the cost of trade execution embedded in every transaction

An investor who buys 100 shares at USD 50.05 and immediately sells them is unlikely to receive USD 50.05 back. The actual sale will execute at the prevailing bid—perhaps USD 49.95—producing an immediate USD 0.10 loss per share. The gap is the bid-ask spread, and it is one of the most reliable transaction costs in trading.

What the bid-ask spread is

The bid-ask spread is the difference between the bid price (the highest price a buyer in the market is willing to pay for the security at a given moment) and the ask price (the lowest price a seller is willing to accept). The mid-price is the simple average of the two; the spread is twice the gap from the mid-price to either side.

For liquid large-cap stocks during normal market hours, the spread is typically 1 cent on stocks above USD 10—the minimum tick size. For less-liquid names, the spread can be 5 cents, 25 cents, or more, depending on the depth of the order book and the volatility of the underlying. For ETFs, the spread varies by the fund's underlying liquidity: SPY trades at penny spreads consistently; thinly-traded sector ETFs can have spreads of 50 basis points or more.

The spread compensates the parties who provide liquidity. A market maker willing to quote a tight bid and ask earns the spread when their orders are hit by both sides over time; the spread is their compensation for inventory risk (the price might move against them while they hold the position) and adverse selection risk (the trader hitting their quote may know something the market maker does not).

How it works in practice

For an investor placing a market order, the spread is paid implicitly. A market buy order executes at the lowest available ask; a market sell order executes at the highest available bid. The investor does not see the spread separately on the trade confirmation; it is embedded in the execution price.

For a round-trip trade—buying and immediately selling—the investor pays the full spread. For an investor who buys and holds for a year before selling, the spread is paid once on entry and once on exit; the cost as a percentage of the position's value depends on the spread and the position size, but is typically a meaningful share of the trade's total cost (separate from any commission charged by the broker).

The spread varies with several factors. Volume: more-traded securities have tighter spreads. Volatility: more-volatile securities have wider spreads (larger inventory risk for liquidity providers). Time of day: spreads are typically widest at the open and close, narrowest in the middle of the regular session. Market regime: spreads widen substantially in stress periods as liquidity providers reduce their willingness to quote.

For institutional traders, the spread is one component of total transaction cost. Market impact (how much the order moves the price as it executes) and timing risk (how much the price moves while the order is being worked) are the other two main components. For retail-scale trades in liquid securities, market impact is typically negligible; the spread plus the broker commission is the dominant cost.

What the evidence shows

The spread cost has compressed dramatically over the past two decades. Decimalisation of US equity quotes in 2001 (replacing 1/16 fractional pricing) compressed spreads on most liquid stocks immediately. The growth of high-frequency liquidity provision compressed them further through the 2010s. The typical spread on a liquid US large-cap stock in 2025 is meaningfully tighter than the equivalent spread in 2005.

For ETFs specifically, the spread compression has been most dramatic in the most-traded products. SPY, QQQ, and similar mega-volume ETFs trade at penny spreads with substantial depth. Less-traded ETFs—particularly in narrower asset classes or specialised strategies—can have spreads of 5–50 basis points that materially increase the implicit cost of holding the fund relative to its expense ratio.

Empirically, the round-trip spread cost on a typical retail equity trade is 1–10 basis points for liquid US large-caps and 10–50 basis points for less-liquid names. For investors trading frequently, the cumulative cost is meaningful: an investor who turns over their portfolio twice per year with a 20-basis-point average round-trip spread pays approximately 80 basis points of spread cost per year, on top of any commissions and fund expenses.

Limitations and trade-offs

The spread cost is largely outside the investor's control. Limit orders can sometimes capture better-than-the-spread execution if a counterparty arrives at the limit price, but the trade-off is the risk that the limit never executes. Market orders pay the full spread but guarantee execution. The choice depends on the investor's preference between price control and fill certainty.

For investors building positions through multiple smaller trades (rather than one large trade), the cumulative spread cost can exceed the single-trade alternative. Each small trade pays the spread; the alternative of executing once pays the spread once but may have larger market impact. The optimal trading approach depends on the position size and the security's liquidity profile.

Spread costs in extended-hours trading are typically materially wider than in regular hours. An investor who needs to act on after-hours news through the after-hours session pays both the wider spread and the gap risk against the next regular-session open. The combination is usually more expensive than waiting for the regular session to open.

For long-horizon investors trading infrequently, the spread cost is small relative to other portfolio costs. The compounding cost of fund expenses, manager fees, and tax friction typically dwarfs the spread paid on the few trades the investor executes per year. The spread is a real cost; for the typical retail investor, it is not the dominant one.

Bid-ask spreads in pfolio

Bid-ask spreads are a transaction cost embedded in trade execution, not in pfolio's analytics. The platform reports total returns on the basis of close prices; the actual after-cost return depends on the spread paid at entry and exit, which varies by instrument and broker. The analytics in pfolio Insights describe the close-to-close return; the realised investor return is that figure adjusted for spread and brokerage costs.

Related articles

• ETF liquidity explained: bid-ask spreads, premium, and discount to NAV
• Order types in investing: market, limit, stop, and how each affects execution
• Market makers and liquidity providers: who stands between the buyer and the seller
• Transaction costs in systematic investing: spread, slippage, and market impact