Bid-ask spread
The bid-ask spread is the gap between the highest price a buyer is offering, the bid, and the lowest price a seller will take, the ask or offer. Buying at the ask and selling at the bid loses the spread at once, so it is a cost on every trade that crosses it, and on thin small caps it can be wide.
Why it matters to a small-cap momentum trader
A large, busy stock may trade with a one-cent spread. A low-float small cap can show five, ten or twenty cents between bid and ask, and wider still in the pre-market, after a halt or as it nears a LULD band. Every time you buy at the ask and sell at the bid you pay that gap. On a scalp aiming for twenty cents, a ten-cent spread takes half the target before the stock has moved. The spread also tells you how thin the book is: a wide one usually means little size at each price.
How it is measured
In cents. Spread = best ask − best bid.
As a percentage. Spread ÷ midpoint, where the midpoint is (bid + ask) ÷ 2. The percentage lets you compare a 2-dollar stock with a 20-dollar one.
The national best. The best bid and the best offer across all the exchanges together, the NBBO, are what most quotes show. Level 2 shows the same prices exchange by exchange.
The increment. Under Rule 612 of Regulation NMS a stock under 1 dollar can be quoted to four decimal places, 0.0001. At 1 dollar and above, nearly every small cap quotes in whole cents.
Why small caps have wide spreads
- Few shares on the book. A low float means few resting orders at each price.
- Fast moves. Market makers widen their quotes when the price can jump in seconds.
- The time of day. Pre-market and after-hours books are thin, and the first minutes after the open are fast.
- Halts and bands. Around a LULD pause or a news halt, quotes pull back and the spread opens up.
The spread in Hindsight Markets
The bid, the ask and the book behind them are the ones that were really there at that moment, exchange by exchange. A market order pays the spread the way it would live, and the journal measures each fill against the best bid or ask when the order arrived.
A worked example: what the spread costs
An illustration with made-up numbers, not a real stock or a real day.
The quote. Bid 2.40, ask 2.46. Spread = 2.46 − 2.40 = 0.06. Midpoint = (2.40 + 2.46) ÷ 2 = 2.43. As a percentage, 0.06 ÷ 2.43 ≈ 2.5%.
The round trip. Buy 1,000 shares at the ask, 2.46, and sell them at the bid, 2.40, a moment later with no change in the quote: 1,000 × 0.06 = 60 dollars lost before commissions.
Against the target. If the plan was to make 0.20 a share, the spread takes 0.06 ÷ 0.20 = 30% of it.
A liquid stock. At bid 150.00, ask 150.01, the spread is 0.01 ÷ 150.005 ≈ 0.007% of the price.
Common mistakes small-cap traders make with the spread
- Sending market orders into a wide spread. A market buy pays the ask, and on a thin book often more. Use a limit when the spread is wide.
- Counting P&L from the last trade. A position marked at the last price can show a profit you cannot take, because you would sell at the bid.
- Ignoring the spread in the stop. A stop a few cents under the bid on a ten-cent spread can trigger on noise.
- Trading the open with full size. Spreads are often widest in the first minutes. Let them settle, or trade smaller.
Common questions
- What is the bid-ask spread in simple terms?
- The difference between the most a buyer will pay right now and the least a seller will accept. If the bid is 5.00 and the ask is 5.05, the spread is five cents.
- How do you calculate the bid-ask spread?
- Subtract the bid from the ask. To compare stocks at different prices, divide the spread by the midpoint, the average of the bid and the ask, and read it as a percentage.
- What does a wide bid-ask spread mean?
- Few buyers and sellers near the current price, so trading is expensive and prices can jump. It is common on low-float stocks, in the pre-market and around halts.
- What is a good bid-ask spread?
- The smaller the better for a trader. A spread under 1% of the price is easy to work with on most small caps; once it is a large share of your target, the trade has a cost problem.
- Who earns the bid-ask spread?
- Whoever provides the liquidity. Market makers and traders with resting limit orders buy at the bid and sell at the ask, and those who cross the spread with market orders pay them.
How to practise it in Hindsight Markets
- Open a past trading day at 4:00 a.m. and pull up a gapper on Level 2.
- Note the bid and ask in the header every few minutes, and watch the spread narrow after the open.
- Place a limit order with the bid and ask buttons on the ticket instead of a market order.
- Try the same trade with a market order on a wide spread.
- Open both trades in the journal and compare the Slip column.
Practice this on a real past day in Hindsight Markets
Open a real past day, watch the spread on a low-float runner widen and tighten, and see what it costs you on every round trip.