What Is the Spread?

The spread is the difference between the bid price and the ask price of a financial instrument.

It represents an important trading cost.

Suppose EUR/USD is quoted at:

Bid: 1.1500

Ask: 1.1502

The difference is:

1.1502 − 1.1500 = 0.0002

For this currency pair, that represents a spread of 2 pips.

The market contains different available buying and selling prices.

The distance between the best available bid and ask creates the spread.

The size of that spread can be influenced by several factors.

Highly liquid markets often have many buyers and sellers competing around similar prices.

This can contribute to tighter spreads.

Less liquid markets may have fewer available participants and wider differences between buying and selling prices.

During periods of rapid price movement, uncertainty can increase.

Spreads may widen as market conditions become more volatile.

Major events can affect pricing.

Examples include:

Liquidity can change rapidly around these events, which may affect spreads.

Market conditions differ throughout the day.

A financial instrument may have more active trading periods and quieter periods.

Spreads can therefore vary depending on the time of day.

Depending on the financial product and provider, spreads may behave differently.

Some pricing models may offer variable spreads that change with underlying market conditions.

Traders should always understand the specifications and costs associated with the product they are trading.