Quoted Spread

The quoted spread — also called the bid-ask spread or the nominal spread — is the most straightforward measure of the cost of transacting in a security at the prevailing market prices. If the national best bid for a stock is $49.98 and the national best offer is $50.02, the quoted spread is $0.04, or four cents. A market participant who simultaneously bought at the offer and sold at the bid would pay this four cents per share in transaction costs, divided equally between the two legs of the round trip.

The quoted spread is expressed either in absolute dollar terms (the dollar spread) or as a percentage of the stock's price (the percentage spread or relative spread). For a $50.00 stock with a four-cent spread, the percentage spread is 0.08%, or 8 basis points. The percentage spread is often more useful for comparing liquidity across stocks trading at very different price levels.

In U.S. equity markets, quoted spreads are determined by competitive market making. Exchanges and ATSs host competing bids and offers from market makers, high-frequency trading firms, and other liquidity providers. The tightest bid and the lowest offer from among all these participants are the NBBO — the consolidated national best prices. In highly liquid, frequently traded large-cap stocks such as Apple, Microsoft, or SPY, the NBBO spread is routinely one cent, the minimum tick size for stocks priced above $1.00 under SEC rules. In less liquid mid-cap or small-cap stocks, spreads may be several cents or even several percentage points for thinly traded names.

The SEC mandated the decimalization of U.S. stock prices in 2001, converting the market from fractional pricing (minimum tick of 1/16 or $0.0625) to penny pricing. This change dramatically narrowed quoted spreads across U.S. equities, reducing transaction costs for traders who could access the best prices while simultaneously compressing market maker revenues and contributing to changes in how liquidity was provided on exchanges.

While the quoted spread is easy to observe and widely reported, it has limitations as a measure of true trading cost. The quoted spread applies only to orders that can be fully satisfied at the best price — it does not account for the possibility that a large order will walk through multiple price levels, paying successively worse prices beyond the best displayed quote. This is why market microstructure researchers and institutional execution desks rely on the effective spread (which measures the actual execution price relative to the midpoint) and market impact cost (which measures the price movement caused by the order itself) for a more complete picture of execution quality.

Nevertheless, the quoted spread remains a widely tracked indicator of market health. Regulatory researchers at the SEC monitor trends in quoted spreads over time as one indicator of whether market structure reforms are improving or degrading market quality for investors.