By Marco BösingWhat Is the Bid-Ask Spread?
The bid-ask spread is the difference between the best bid (the highest price someone is willing to pay) and the best ask (the lowest price someone is willing to sell at). It is the most fundamental measure of the cost of immediate execution.
When a trader places a market buy order, they pay the ask price. If they immediately sell back with a market sell order, they receive the bid price. The difference -- the spread -- is the loss incurred from immediate purchase and sale.
Components of the Spread
Best Bid
The best bid is the highest limit buy order in the order book. It represents the highest price a buyer is willing to pay.
Best Ask (Best Offer)
The best ask is the lowest limit sell order in the order book. It represents the lowest price a seller is willing to accept.
Spread Calculation
Spread = Best Ask - Best Bid
Example in NQ futures: Best Bid = 18,250.00 / Best Ask = 18,250.25 -> Spread = 0.25 points (= 1 tick = $5 per contract)
Spread as a Liquidity Indicator
The spread is a direct indicator of market liquidity:
- Tight spread (e.g., 1 tick): High liquidity, many market participants, low trading costs. Typical for liquid futures like ES, NQ, or Bund futures
- Wide spread (multiple ticks): Low liquidity, few market participants, higher trading costs. Typical for illiquid instruments or outside main trading hours
Spread Dynamics
The spread is not static but changes with market conditions:
- Before news events: The spread widens as market makers reduce their risk
- During high volatility: The spread widens as uncertainty increases
- In quiet phases: The spread narrows as market makers compete for order flow
- At session close: The spread may widen as liquidity providers close positions
Why the Spread Widens Before News
I see this on every CPI or FOMC day: minutes before the release, market makers pull their limit orders from the order book. They do not want to risk being on the wrong side of a sudden move. The result is a thinner order book and a wider spread. For you as a trader, this means: the cost of a market order rises at exactly the moment when many traders want to enter quickly.
Spread and Trading Costs
For active traders, the spread is a significant cost factor:
- Scalpers trade hundreds of times per day and pay the spread on every trade. A 1-tick spread over 100 trades means 100 ticks in spread costs
- Swing traders pay the spread only on entry and exit. The relative impact on total profit is smaller
- Limit order traders can avoid the spread by providing liquidity instead of taking it. They earn the spread rather than paying it
Spread Costs in Context
A practical example: a scalper trades the NQ with 50 round trips per day. At a spread of 1 tick (0.25 points = $5 per contract), they pay 50 x $5 = $250 daily in spread costs alone. Over a month of 20 trading days, that is $5,000. Commissions come on top. This calculation shows why spread efficiency is not optional for active traders.
The Role of the Market Maker
Market makers are the most important liquidity providers in the order book. They continuously post bid and ask quotes and earn from the spread. In liquid markets, many market makers compete with each other, which keeps the spread tight. In illiquid markets, there is less competition, and the spread widens.
For us as traders, this matters because the market maker stands on the other side of our market orders. They are willing to take on the risk -- but only for a premium, and that premium is the spread.
Common Mistakes
- Ignoring spread in backtesting: Many backtests run without accounting for spread costs. The result looks profitable but is not in reality. Always factor in the spread.
- Trading during illiquid hours: The spread in the Asian session can be 2-4 ticks in the NQ. The same setup that is profitable with a 1-tick spread during the US session becomes a losing proposition in the Asian session.
- Sending market orders during wide spreads: Placing a market order before news or at session close when the spread is 3-4 ticks means starting with a significant disadvantage immediately.
Frequently Asked Questions
Why is the spread in futures typically tighter than in CFDs?
Futures are traded at central exchanges where thousands of market participants compete directly. CFDs are traded against the broker, who uses the spread as a revenue source and is not required to allow genuine competition. The result: futures spreads in liquid markets are nearly always at 1 tick, while CFD spreads are noticeably wider.
What is a normal spread for NQ futures?
During main trading hours (US session), the NQ futures spread is 0.25 points (1 tick). Outside main trading hours or before major news, the spread can widen to 2-4 ticks. The ES (S&P 500 futures) also maintains a near-constant 1-tick spread during regular trading hours.
Can the spread be zero?
Theoretically not, since bid and ask represent different market participants. In practice, the minimum spread is 1 tick (the smallest tradable price increment). Even in the most liquid markets in the world, such as the ES future, there is always at least a 1-tick spread.