Spread, slippage, and liquidity
The spread is the gap between the buy and sell price, and so an invisible fee. Slippage is the gap between the expected and the actual execution price.
Every market has two prices: the one you can buy at instantly, and the slightly lower one you can sell at instantly. The gap between them is the spread.
Buy and immediately sell again, and you lose that amount even though the price never moved. For frequent trading, that's often the biggest cost item, even though it never shows up as a fee on any statement.
Slippage is something different: you see a price, click buy, and get filled at a slightly different one. That happens during fast moves, with large orders, and in thin markets.
Both depend on liquidity. For a broad index ETF during normal trading hours, spread and slippage are tiny. For a small stock in the evening, or a rarely traded coin, they can run several percent.
The spread compensates the market maker for supplying liquidity and for bearing adverse-selection risk. It widens systematically during higher volatility, lower trading activity, and around news events, since the risk of trading against informed participants rises then.
The effective trading cost of an order can be measured as the gap between the execution price and the midpoint of the best buy and sell price at the time the order was submitted. That figure captures both half the spread and the market impact of larger orders, and is the robust benchmark for comparing providers.
Market impact grows sub-proportionally with order size, often roughly with the square root of the ratio between order size and typical daily volume. For retail investors, this effect is negligible in liquid names, but substantial in small-cap stocks and low-volume crypto assets, often exceeding every stated fee combined.
Summary
- The spread is a fee that never appears on any statement.
- Spreads widen during volatility, outside core hours, and around news.
- For small assets, spread and slippage often exceed every stated fee.
Did you get it?
What do you lose by buying and immediately selling?
The spread, even if the price hasn't moved.
When do spreads widen?
During high volatility, low trading activity, and around news events.
How is effective trading cost measured?
As the gap between the execution price and the midpoint of the buy and sell price when the order was submitted.
Related
- Trading hoursStage 1
- Understanding the trading interfaceStage 1
- Order typesStage 1