Spread Costs

The bid ask spread is a cost on almost every trade, but because it never shows up as a separate line on your statement, it is easy to underestimate. For anyone who trades often, spread costs can exceed commissions many times over. This lesson shows how to calculate them, how they scale with trading frequency and how to reduce them.

Spread cost per trade#

When you buy at the ask and later sell at the bid, the full spread is a cost of the round trip, even if the midpoint price never moves.

Round trip spread cost = Spread × Quantity
Spread cost % = Spread ÷ Midpoint × 100

If you trade one side with a market order and the other with a limit order that fills at your price, you pay roughly half the spread.

How spread costs add up#

Typical spreads by market#

These are rough guides; spreads widen around news, at the open and close and in volatile conditions.

Why short term traders feel spreads most#

The shorter your holding period, the smaller your average profit per trade, and the larger the spread is as a share of it. A swing trader targeting 5% per trade barely notices a 0.05% spread. A scalper targeting 0.15% loses a third of every win to it. See Scalping.

Reducing spread costs#

1. Trade the most liquid instruments that fit your strategy. See Liquidity.
2. Use limit orders to buy at the bid or sell at the ask, capturing part or all of the spread. See Limit Orders.
3. Avoid the widest times: the open, the close, overnight sessions, holidays and the seconds around news.
4. Hold longer so the spread is a smaller share of each trade's move.
5. For options, trade near the midpoint and favour strikes and expiries with tight spreads and high open interest.
6. In forex and CFDs, compare account types: raw spread plus commission accounts can be cheaper than spread only accounts for active traders.

Measuring your own spread costs#

Record the quote when you trade and compute half spreads paid on market orders and spreads saved on limit orders. Over a month, compare total spread cost with commissions and with your profits. Many traders find spreads are their largest cost. See Slippage Analysis.

Frequently asked questions#

Is the spread a fee?#

It is not a fee charged on your statement, but it is a real cost you pay to whoever is on the other side, usually a market maker.

How do I calculate spread cost?#

Multiply the spread by the number of units traded for a round trip, or divide the spread by the midpoint price to express it as a percentage.

Why are spreads wider on options?#

Options are less liquid than their underlying stocks, and market makers face more complex risks, so they quote wider spreads.