What Is the Bid-Ask Spread Percentage and How Is It Calculated?

When buying or selling a financial asset, the price you see isn’t always the price you get. The bid-ask spread represents the difference between what buyers are willing to pay and what sellers are asking for, directly affecting trading costs and investment returns.

Understanding the percentage form of this spread helps compare costs across different assets and markets. Several factors influence its size, making it an important consideration for traders and investors.

Calculation

To determine the bid-ask spread percentage, measure the absolute difference between the bid price and the ask price. Expressing this difference as a percentage allows for better comparisons across securities with different price levels.

The percentage is calculated by dividing the spread by the ask price and multiplying by 100. This standardizes the spread relative to the asset’s selling price. For example, if a stock has a bid price of $49.50 and an ask price of $50.00, the absolute spread is $0.50. Dividing this by the ask price of $50.00 and multiplying by 100 results in a bid-ask spread percentage of 1%.

A lower percentage generally indicates a more liquid market with tighter spreads, while a higher percentage suggests greater transaction costs. Traders use this metric to compare similar assets or assess how market conditions affect trading expenses.

Key Influences on the Percentage

Several factors determine the bid-ask spread percentage, making it a dynamic measure that varies across assets and market conditions. Liquidity, volatility, and market depth each influence how easily trades can be executed.

Liquidity

Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price. Highly liquid securities, such as large-cap stocks or major currency pairs, tend to have lower bid-ask spreads due to high trading volumes. For example, shares of Apple Inc. (AAPL) typically have a narrow spread.

Illiquid assets, such as small-cap stocks or thinly traded bonds, often have wider spreads. Fewer market participants mean less competition between buyers and sellers, increasing transaction costs. In the bond market, municipal bonds frequently have higher bid-ask spreads than U.S. Treasury securities due to lower trading volumes and less standardized pricing.

Liquidity also plays a role in financial reporting under IFRS 13 and ASC 820, which govern fair value measurement. A wider bid-ask spread may indicate a less active market, requiring adjustments in valuation models.

Volatility

Market volatility significantly impacts the bid-ask spread percentage. Higher price fluctuations increase uncertainty for both buyers and sellers, leading market makers to widen spreads to compensate for risk. This is particularly evident during earnings announcements, economic data releases, or geopolitical events.

During the 2020 market turmoil caused by the COVID-19 pandemic, bid-ask spreads widened across asset classes as uncertainty surged. In the options market, implied volatility—measured by the VIX (Cboe Volatility Index)—influences spreads, with higher volatility leading to greater pricing discrepancies.

The SEC’s Regulation NMS (National Market System) aims to promote fair and efficient markets by ensuring investors receive the best available prices. However, during extreme volatility, market makers may temporarily widen spreads or halt trading to manage risk.

Market Depth

Market depth refers to the number of buy and sell orders at various price levels beyond the best bid and ask. A deep market, with substantial order book liquidity, generally results in tighter bid-ask spreads. This is common in major stock exchanges like the NYSE and Nasdaq, where high-frequency trading firms and institutional investors contribute to market efficiency.

Assets with shallow market depth—such as penny stocks or exotic currency pairs—experience wider spreads due to limited order flow. A lightly traded biotech stock, for example, may have only a few market participants willing to transact, leading to greater price discrepancies.

Market depth is also relevant in financial reporting under ASC 820 and IFRS 13, which prioritize Level 1 inputs (quoted prices in active markets) for fair value measurement. When market depth is low, firms may need to rely on Level 2 or Level 3 inputs, incorporating models and assumptions to estimate fair value.

Variations Among Asset Classes

The bid-ask spread percentage differs widely across asset classes due to structural differences, regulatory frameworks, and market participation.

Stocks listed on major exchanges such as the NYSE and Nasdaq tend to have tighter spreads for large-cap companies due to high trading volumes and continuous price discovery. In contrast, over-the-counter (OTC) equities, including pink sheet stocks, often experience wider spreads due to the absence of centralized order books and less stringent reporting requirements under SEC Rule 15c2-11.

Fixed income securities exhibit even greater variation. U.S. Treasury bonds generally have the narrowest spreads due to deep liquidity and standardized issuance. Corporate bonds display wider spreads, particularly for lower-rated debt, as credit risk and secondary market activity impact price efficiency. Municipal bonds, which trade in decentralized dealer markets, often have inconsistent pricing, leading to higher transaction costs.

In foreign exchange markets, major currency pairs like EUR/USD and USD/JPY maintain consistently low spreads due to high global trading activity. Emerging market currencies, on the other hand, face wider spreads due to geopolitical risks, capital controls, and lower trading volume. Central bank interventions, such as those by the Bank of Japan or the Reserve Bank of India, can further distort spreads by influencing supply and demand.

Commodity markets also display significant disparities. Gold and crude oil benefit from deep futures markets that facilitate tighter spreads. Agricultural commodities, such as corn or coffee, often experience wider spreads due to seasonal supply fluctuations and storage costs. Futures contracts on these commodities may also reflect contango or backwardation, impacting the cost of rolling positions.