TradingBeginner#Market Microstructure#Beginner
Bid-Ask Spread
B
Definition
The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask), representing the hidden cost of trading.
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Concept Diagram
Key Takeaways
1
The spread is the difference between the highest bid and lowest ask — it's the hidden cost of every trade.
2
Tight spreads (< 0.1%) indicate high liquidity; wide spreads (> 1%) signal low liquidity.
3
Market makers profit by capturing the spread across thousands of trades.
4
During volatile periods, spreads widen as market makers pull liquidity to reduce risk.
Practical Example
You want to buy BTC immediately. The best bid is $99,998 and the best ask is $100,002. The spread is $4 (0.004%). You buy at $100,002. To instantly sell, you'd get $99,998. You've already lost $4 just from the spread — before any exchange fees.
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Related Terms
Blockchain
Liquidity PoolA collection of funds locked in a smart contract used to facilitate trading by providing liquidity on decentralized exchanges.
Trading
SlippageThe difference between the expected price of a trade and the actual price at which the trade is executed due to low liquidity.
Trading
Order Book DepthThe volume of buy and sell orders at each price level in an exchange's order book, indicating market liquidity and potential price impact of large trades.
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