Bid, Ask, and Spread

Bid, Ask, and Spread

Every asset on every exchange has two prices at any given moment: the bid price and the ask price. The difference between them is the spread. Understanding these three concepts is fundamental to understanding your true trading costs.

What is the Bid Price?

The bid price is the highest price that a buyer is currently willing to pay for an asset. If you want to sell immediately using a market order, you will receive the bid price. The bid represents current demand for the asset.

When you see multiple bid prices in the order book, the topmost bid (highest price) is the “best bid.” It represents the most a buyer is willing to pay right now.

What is the Ask Price?

The ask price is the lowest price that a seller is currently willing to accept. If you want to buy immediately using a market order, you will pay the ask price. The ask represents current supply of the asset.

The lowest ask in the order book is the “best ask.” It represents the cheapest price at which you can buy the asset immediately.

What is the Spread?

The spread is the difference between the best ask and the best bid:

Spread = Best Ask - Best Bid

For example, if the best bid for ETH is $2,000.00 and the best ask is $2,000.50, the spread is $0.50.

The spread can also be expressed as a percentage:

Spread % = (Best Ask - Best Bid) / Best Ask x 100

In this case: ($2,000.50 - $2,000.00) / $2,000.50 x 100 = 0.025%

Why the Spread Matters

The spread is essentially a hidden trading cost. Every time you execute a market order, you are crossing the spread. Here is why that matters:

Example: ETH has a bid of $2,000 and an ask of $2,001.

• You buy ETH at the ask price: $2,001.
• You immediately want to sell at the bid price: $2,000.
• You have already lost $1 per ETH before even considering trading fees.

For high-frequency traders or bots executing many trades, the spread can significantly impact profitability.

What Affects the Spread?

Several factors influence how wide or narrow the spread is:

Liquidity: Highly liquid assets (like BTC and ETH on major exchanges) tend to have very tight spreads, often just a few cents. Less liquid assets can have spreads of several dollars or more.

Volatility: During periods of high volatility, market makers widen their spreads to compensate for the increased risk. This is why spreads often blow up during market crashes or sudden pumps.

Trading volume: Higher volume generally means tighter spreads because more participants are competing to offer the best prices.

Time of day: Some assets have wider spreads during off-peak hours when fewer traders are active.

Exchange: The same asset can have different spreads on different exchanges depending on each platform’s liquidity and user base.

Spread and Trading Costs

Your total cost per trade includes both the explicit fee and the implicit spread cost:

Total Cost = Trading Fee + Half the Spread

Why half? Because you pay half the spread when you enter (buying at the ask instead of the mid-price) and the other half when you exit (selling at the bid instead of the mid-price).

For a round trip (buy and sell), you pay the full spread plus fees on both trades.

How Grid Bots Minimize Spread Costs

Grid bots have a natural advantage when it comes to spreads. Because they use limit orders rather than market orders, they do not cross the spread. Instead:

• Buy orders are placed on the bid side at specific grid levels.
• Sell orders (take-profit) are placed on the ask side at the next grid level up.

By sitting on both sides of the order book and waiting for the price to come to them, grid bots avoid paying the spread. In fact, they provide liquidity and earn the spread, which is one of the reasons grid trading can be profitable even with small price movements.

Summary

• The bid is the highest buy price and the ask is the lowest sell price, with the spread being the gap between them.
• The spread is a hidden trading cost that you pay every time you use a market order, making it a significant factor for frequent traders.
• Grid bots use limit orders to avoid paying the spread and instead capture it, giving them a cost advantage over market order strategies.

Next Step

Understanding order types is crucial for effective trading: Limit vs Market Order