bid/ask spread

B

The Bid-Ask Spread, also known as the Bid-Offer Spread, is the quote of the price at which participants in a market are willing to buy or sell a good or security. Specifically, the bid price is the price at which a party is willing to purchase, while the ask (or offer) price is the price at which the same person or another party is willing to sell the same good or security. The spread between the two prices arises as valuations differ, and transactions usually occur somewhere in the middle as one party changes the price they are willing to pay or accept in order to obtain or sell the good or security.

For example, the above quotation shows participants in a market are willing to pay 1.2635 for the EURUSD, and are conversely willing to sell the same pair at 1.2638. This creates a 1.2635/38 spread, which is 3 basis points wide.

 

Often referred to at the Bid Offer Spread, this is the amount the buy price (ask or offer price) exceeds the sell price (bid).

 

Source of the Bid Ask Spread

Every market has a spread. Whether Foreign Exchange, equities, futures or your local boutique, the market maker will practically always charge a higher price than the one originally paid.

 

The size of the spread is primarily due to liquidity and transparency in the market. More buyers and sellers competing in the same space bring bid/offer spreads lower. When all participants have access to the same price information at the same time, few market makers are able to get away with wider than normal spreads since traders will easily find a better offer (or bid) elsewhere.

 

Since Foreign Exchange is the world’s biggest and most liquid market and as technology has given anyone with access to a computer and the internet real-time pricing information – spreads in fx are extremely low – just factions a cent.

 

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