How it works
Every traded instrument has two prices at every moment: the bid where the market will buy from you, and the ask where the market will sell to you. The bid is always lower. The gap is the spread, and it is paid to whichever venue is matching your order against a counterparty on the other side.
Example
EUR/USD: bid 1.0850, ask 1.0856. Spread is 6 pipettes, or 0.6 pip. If you buy at 1.0856 and immediately try to sell, you are filled at 1.0850. The 0.6 pip difference, about $6 on a standard lot, is the cost. On a stock like AAPL: bid 178.42, ask 178.45. Spread is 3 cents, or roughly 0.017 percent.
What widens the spread
- Low liquidity (exotic pairs, after-hours stocks, small-cap names)
- High volatility (news releases, market open, fast moves)
- Large size relative to the visible book
- Market-maker venues vs. ECN routing
Why it matters
Spread is the most consistent trading cost you pay. Commission is visible and bookable, slippage is intermittent, but the spread fires on every entry and every exit. A strategy that takes 50 round trips a week at 2 pips average spread pays 100 pips of fixed cost before any trade decision matters. Tracking realised spread by session and pair is as important as tracking PnL.
