Clear DefinitionsBid-Ask Spread
1 min read
Pronunciation
[bid-ask spred]
Analogy
Think of it as the gap between the price someone wants to sell their car for and the price a buyer is willing to pay—this gap is the cost of trading.
Definition
The difference between the lowest price a seller is willing to accept (ask) and the highest price a buyer is willing to pay (bid) in an order‑book market.
Key Points Intro
The bid‑ask spread reflects market liquidity and trading costs.
Key Points
Liquidity indicator: Tight spreads imply high liquidity; wide spreads imply low liquidity.
Transaction cost: Traders pay the spread when crossing the book.
Volatility impact: Spreads widen in volatile conditions.
Market depth: Depends on order sizes at best bid and ask levels.
Example
On a DEX order book, if the best bid for ETH is 2,000 USDC and the best ask is 2,002 USDC, the bid‑ask spread is 2 USDC.
Technical Deep Dive
Order‑matching engines maintain sorted bid and ask queues. The spread equals ask₀ − bid₀. Market orders consume liquidity at these prices, incurring the spread as implicit cost. In on‑chain matching, each price level check and state update incurs gas, so thin books may lead to high gas‑adjusted spreads.
Security Warning
Wide spreads can be exploited by sandwich and front‑running bots, increasing effective slippage for traders.
Caveat
Aggregated spreads across multiple venues may differ; comparing only one market can misstate true trading cost.
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