Bid-offer spread

Bid-offer spread

The bid/offer spread (also known as bid/ask spread) for assets (such as stock, futures contracts, options, or currency pairs) is the difference between the price available for an immediate sale (bid) and an immediate purchase (ask). The trader initiating the transaction is said to demand liquidity, and the other party (counterparty) to the transaction supplies liquidity. Liquidity demanders place market orders and liquidity suppliers place limit orders. For a round trip (a purchase and sale together) the liquidity demander pays the spread and the liquidity supplier earns the spread. All limit orders outstanding at a given time (i.e., limit orders that have not been executed) are together called the Limit Order Book. In some markets such as NASDAQ, dealers supply liquidity. However, on most exchanges, such as the Australian Securities Exchange, there are no designated liquidity suppliers, and liquidity is supplied by other traders. On these exchanges, and even on NASDAQ, institutions and individuals can supply liquidity by placing limit orders.

Example: Currency spread

The exchange rate between the South African rand and the United States dollar might be 6.50 rand to the dollar. A person looking to convert rand into dollars might have to pay 6.55 rand for each dollar, while a person looking to convert dollars to rand might receive only 6.45 rand for each dollar he converts. It is usually written as USDAR 6.456.55, or simply 6.4555. 6.45 is the bid and 6.55 is the ask for 1 USD. (USD and ZAR are the International Organisation for Standardisation abbreviations ISO 4217 for the US and South African currency.)so for example the spread for the currencies pair is 6.55-6.45 = 0.10 wish means 10 pips.

Example: Stock spread

A customer might place a market order with a broker to buy 100 shares of Amalgamated Widgets. In response, the broker might attempt to buy 100 shares at $12.50 each, and then sell those shares to the customer at $12.60 each. In doing so, the broker would reap 100 times his $12.60 - $12.50 = $0.10 spread, or $10 on the trade. The broker knows that if he makes his spread larger, the customer might choose to instead find another broker with a lower spread. As a result, spreads are often only what the market will bear.

On United States stock exchanges, the minimum spread for many shares was 12.5 cents (one-eighth of a dollar) until 2001, when the exchanges converted from fractional to decimal pricing, enabling spreads as small as one cent. The change was mandated by the U.S. Securities and Exchange Commission in order to provide a fairer market for the individual investor.

See also

* Scalping (trading)


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Look at other dictionaries:

  • bid-offer spread — ➔ spread2 * * * bid offer spread UK US noun [C] (also bid ask spread) ► STOCK MARKET the difference between the price that someone will pay for shares, etc. and the price that they will sell them at: »The bid offer spread on equity options is a… …   Financial and business terms

  • bid/offer spread — noun In a financial market, the difference between the bid and offer prices, representing the dealer s margin • • • Main Entry: ↑bid …   Useful english dictionary

  • bid/offer spread — The difference between the bid price and the offer price of a security. Dresdner Kleinwort Wasserstein financial glossary The offer price is what you pay if you want to buy an investment and the bid price is what you get when you want to sell.… …   Financial and business terms

  • bid offer spread — The difference between the bid price and the offer price of a security. Dresdner Kleinwort Wasserstein financial glossary The difference between the bid and offer prices of a security. Exchange Handbook Glossary The difference between the bid and …   Financial and business terms

  • bid-offer spread — The difference between an offer price and the bid price …   Big dictionary of business and management

  • bid-offer spread — /ˌbɪd ɒfə spred/ noun the difference between buying and selling prices (i.e. between the bid and offer prices) …   Dictionary of banking and finance

  • Bid-offer Spread —   Refer instead to Spread …   International financial encyclopaedia

  • bid-ask spread — ➔ spread2 * * * bid ask spread UK }} US }} noun [C] STOCK MARKET ► BID OFFER SPREAD(Cf. ↑bid offer spread) …   Financial and business terms

  • bid ask spread — See bid offer spread. Dresdner Kleinwort Wasserstein financial glossary …   Financial and business terms

  • bid-offer price — /ˌbɪd ɒfə praɪs/ noun a price charged by unit trusts to buyers and sellers of units, based on the bid offer spread …   Dictionary of banking and finance

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