Spread
What Is a Spread?
A spread is the difference between the highest price a buyer is willing to pay for an asset (bid price) and the lowest price a seller is willing to accept (ask price). This gap is what’s known as the spread and is a key component in trading and market liquidity.
How It Works
- Bid-Ask Spread: When you look at an order book, the bid represents the top price a buyer wants to pay, and the ask is the minimum price a seller wants. The spread is the space between these two numbers.
- Market Indicator: A tight (small) spread typically indicates a highly liquid market with lots of buyers and sellers. A wide (large) spread suggests lower liquidity and potentially higher volatility.
- Profit for Market Makers and Exchanges: Market makers profit by buying at the bid price and selling at the ask price, pocketing the spread as their profit. Exchanges may also earn indirectly from spreads by facilitating trades between buyers and sellers.
Example
If Bitcoin has a bid price of $29,950 and an ask price of $30,000, the spread is $50. Traders wanting to buy instantly at the ask price or sell at the bid price must account for this spread, which reflects trading costs. In other words, if you sell one Bitcoin you will earn $29,950, but if you buy Bitcoin you will have to fork out $30,000, meaning you’ve incurred a loss of $50. Likewise, if you buy Bitcoin for $30,000 you can only sell it for $29,950, meaning you’ve incurred a loss of $50. This is often considered the hidden cost of trading which market makers and exchanges profit from.
How’s Ouinex different? Not only are our spreads low as we have ultra high liquidity, they’re visible. So there are no “hidden costs.” You’re welcome!
The Sum Up
In short, the spread tells you the cost of trading and indicates the liquidity level of an asset.