The bid-ask spread feels like a small, stable number on a quiet screen — one or two cents on a major stock, and hardly worth thinking about. Then the market opens on news, or you check the same stock at 3 a.m., and the gap has quietly tripled.
Spreads are not set by the exchange and they are not fixed fees. They are the distance between other people's standing orders, and those people re-price constantly. Knowing what makes them step back explains when immediate execution becomes expensive — usually exactly when you most want to trade fast.
The spread is the gap between the best standing buy and sell quotes, and it is set by whoever provides liquidity. It widens when those participants pull back or demand more compensation: thin trading hours, breaking news, high volatility, and structurally illiquid instruments. A wider spread means a higher hurdle for every round trip — check the current spread before demanding immediate execution, not just the last traded price.
Who actually sets the spread?
Every moment, the visible quotes are orders that someone chose to display: market makers and other liquidity providers, plus ordinary limit orders from traders willing to wait. Their ask says “I will sell you at this price”; their bid says “I will buy from you at this price.” The gap between those two commitments is the spread.
Standing ready costs money. A liquidity provider can end up holding inventory at the wrong moment, or trading against someone who knows something they do not. The spread is the compensation for taking those risks — so whenever the risks feel bigger, the quotes move apart.
| Trigger | What participants do | Result |
|---|---|---|
| Thin hours (pre-market, midday lulls, holidays) | Fewer quotes displayed; providers widen terms | Spread expands, visible size shrinks |
| Breaking news / uncertainty | Quotes cancelled or re-priced with a safety margin | Spread jumps; fills slip beyond first tier |
| High volatility | Risk of adverse moves rises, so compensation rises | Persistently wider spread while turbulence lasts |
| Structurally illiquid instruments | Few participants trade them at all | Permanently wide spread, even on quiet days |
| Large order relative to depth | Best tier exhausted quickly | Effective cost spreads across multiple price levels |
The same stock, two very different spreads
Take a stock quoted around 100. During liquid hours the spread might be 0.02 — about 0.02% of the price. The same stock just before the open, with few quotes standing, might show a 0.50 gap — 0.50%, twenty-five times wider in relative terms.
For an immediate round trip on 100 shares, the friction scales with the spread: 100 × 0.02 = 2 in liquid hours versus 100 × 0.50 = 50 in the thin window. Nothing about the company changed — only the number of people willing to stand between buyers and sellers.
Short-term strategies feel this directly: an edge of a few tenths of a percent per trade can survive a 0.02% spread and be erased by a 0.50% one.
Spreads tend to widen precisely when emotions are strongest — right after news, during crashes, near the open. The moments when you feel the most urgency to trade are the moments when immediate execution charges the most.
What widening means for your order
A market order accepts whatever terms are standing when it arrives, so a widened spread converts directly into a worse entry or exit. Slippage and wide spreads often appear together: the gap is already wide, and if your size exhausts the first tier, the effective price moves further.
Trigger-based orders inherit the same environment. A stop order is a trigger, not a price guarantee — once it fires, the resulting order still fills against a book that may have widened since you set it.
None of this makes thin hours or news untradeable. It means the moment of execution is part of the cost structure, and it deserves a glance before you commit.
- I checked the current spread, not just the last traded price.
- I know roughly what this instrument's spread looks like in normal hours, so I can tell when it is abnormal.
- My order size is small relative to the visible depth at the best quotes.
- For time-sensitive orders, I considered a limit price as a guardrail — and I accept it might not fill.
- My expected edge on this trade is larger than the round-trip spread plus commissions.
Frequently Asked Questions
Do spreads always widen at the open and close?
They often do — those sessions combine concentrated order flow with thinner standing quotes. But the widening is not scheduled; it depends on how many participants are quoting at that moment, so the same session can differ day to day.
Why do some assets always have wide spreads?
Structural reasons: few participants, small float, low trading volume, or products whose risks most traders do not want to hold. With nobody competing to quote, the gap stays wide even on quiet days.
Is a wide spread always a reason to stay out?
Not automatically. For a long-term position, the spread is a one-off entry cost that may be negligible against the holding period. For very short-term trades, the same spread can consume the entire edge — so the verdict depends on your holding period and expected edge.
