Britannica Money

bid-ask spread

Written by
Doug Ashburn
Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago.
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Bid-ask spread
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The spread is the market-maker's edge.
© insta_photos/stock.adobe.com

The bid is the highest price a potential investor is willing to pay for a stock, bond, commodity, or other asset. The ask is the lowest price a seller is prepared to accept for the same asset. The difference, or “spread,” between those two is called the bid-ask spread.

When the bid-ask spread is narrow, it may indicate:

The wider the bid-ask spread, the more a price might need to move (up or down) to entice a buyer and seller to agree on a transaction. For example, consider home prices. During and after the Great Recession of 2007–09, a glut of home foreclosures created a “buyer’s market,” when the seller of a home needed to reduce the asking price by 10% to 20% or more in order to attract a buyer. In contrast, after the COVID-19 pandemic, a shortage of available homes led to bidding wars, resulting in buyers offering thousands of dollars above the listed asking price.

In the modern stock market, where retail brokerage firms offer zero-commission trading, the bid-ask spread is the cost of buying or selling, and represents payment to the market maker for providing a liquid and orderly market. In the U. S. and some other developed markets, market makers will “rebate” part of their profit margin to the broker in what’s called payment for order flow (PFOF). In other words, crossing the bid-ask spread helps keep the financial markets intact.

Doug Ashburn