Bid-Ask Spread

The big-ask spread is the price difference between the highest bid from the buyers to the least price a seller is willing to accept for any given asset class. The spread often defines the transaction cost with price takers intending to buy at the asking price while selling at the bid price.

On the contrary, market makers purchase at the bid price while selling at the asking price. This makes the bid-ask spread the perfect metric to measure market liquidity. Since the bid-ask spread is dependent on the asset liquidity, the more liquid an asset gets, the tighter the spread becomes.

Other factors that contribute to the bid-ask spread include security that makes it tighter. Similar heavily traded stocks also have a smaller bid-ask spread. In other words, executing a limit order for the bid-ask process can make the bid-ask spread an absolute success.