What a spread is

Every quote is two prices 

A single price for an instrument is a headline. A tradeable quote is a pair. The lower of the two is the bid, the price at which the quoting party stands ready to buy, so it is the price a seller receives. The higher is the ask, also called the offer, the price at which that party stands ready to sell, so it is the price a buyer pays. Neither number means anything on its own.

The names read backwards the first time because they are written from the quoting party's point of view. The bid is where that party bids for the instrument, so a client selling transacts there. The ask is where it asks for the instrument, so a client buying transacts there. Every transaction meets the far side of the quote from the one it seems to belong to.

A long position opens at the ask and closes at the bid. A short opens at the bid and closes at the ask. The spread is therefore a property of the quote rather than of a trade, and it is met once on the way in and once on the way out.

Measuring the gap 

The measurement is a subtraction. The bid is taken away from the ask, and the remainder is expressed in the increment the instrument's convention uses: the pip for a currency pair, the index point for an index, the smallest increment the listing quotes in for a shares contract. A spread stated without its unit is unreadable, because the same digits mean different distances in different markets.

Two spreads quoted in the same unit on different instruments are still not the same cost, because the unit is worth a different amount in each.

Turning a spread into money 

Converting a spread into money takes one further input, the contract size. The money value is the size of the gap, multiplied by what one increment is worth per unit, multiplied by the units the position covers. In a four decimal pair a pip is one ten thousandth of the quote currency per unit of the base, so on a standard lot of one hundred thousand units, one pip is worth ten units of the quote currency.

The proportionality is the part worth carrying forward. A spread is a per unit cost, so the money it represents scales with size exactly and without any threshold, and a spread that widens at a fixed size raises the cost by the proportion it widened.

Why a position opens showing a small loss 

A new position almost always shows an unrealised debit the instant it appears, which reads as though something has gone wrong. Nothing has. An open position is marked at the price that would close it, not at the price that opened it: a long opened at the ask is marked at the bid, a short opened at the bid at the ask. The mark is the far side of the same quote, so the opening figure is the spread, in money, as a debit.

A cost, not a charge 

The distinction between a cost and a charge carries the rest of this module. A charge is a stated amount debited as its own entry. A cost is anything that leaves less at the end than there would otherwise have been. Every charge is a cost, not every cost is a charge, and the spread is the plainest example of one that is not.

Practitioners talk about paying the spread, a metaphor that survives because the effect is indistinguishable from a payment. Nothing is handed over, and the position simply begins behind by that amount. Commission is the visible half of the same question and is the subject of the next lesson.

What makes a spread widen 

A spread is not a fixed property of an instrument. It is the price of immediacy, and it moves with the depth of resting interest on either side of the quote and with the risk carried by whoever is quoting. Several conditions change it, and they are not independent of each other.

• Depth of participation. The more competing interest rests near the current price, the narrower the distance between the best buyer and the best seller.
• Time of day. An instrument's book is deepest in the hours its largest participants are at their desks, and thinnest around a weekly reopening after a market break.
• Scheduled events. Ahead of a data release or a policy decision, quoting parties widen because the risk of holding a position through a jump has risen.
• Unscheduled shocks. A sudden headline removes resting interest faster than it can be replaced, and the quote widens until participants return.
• The instrument itself. The most heavily traded currency pairs and the largest index contracts are quoted more tightly than thin ones, structurally rather than temporarily.
• Size relative to the book. A quoted spread holds for a stated size, and an order larger than the interest resting at the best prices reaches deeper and worse levels. That mechanism has its own lesson later on.

Where practitioners disagree 

Two arguments about the spread are genuinely unsettled. The first is where in a trade it should be booked. One convention attributes the whole spread to the entry, since the opening mark shows it immediately. Another splits it, half to the entry and half to the exit, since it is only realised once both legs are done. The total is identical either way, so the disagreement is about attribution rather than arithmetic, and a comparison that mixes the two conventions is comparing different measurements.

The second is whether published figures are comparable across firms at all. Averages are compiled over windows and instrument sets a reader cannot see, so two figures produced by different methods are not the same measurement even when they carry the same label. One tradition holds that an average is the only practical summary of a distribution. Another holds that the shape of the distribution, particularly around releases, is what determines the cost of a trade, and that an average conceals exactly that. Both are reasonable, which is why the last lesson in this module is a method rather than a number.

What a published spread figure is 

A firm publishes a typical spread per account type rather than a single number for the whole firm, because the pricing arrangement differs between account types and the spread is only one half of it. At YAL the typical EUR/USD spread on the Raw Spread account is 0.1 pips, with a commission of $3.50 per lot, per side. On the Standard account the typical EUR/USD spread is 0.8 pips, with a commission of $0. Reading either spread figure without the commission beside it describes half of an arrangement, which is why the two are always published together and why the next two lessons take commission and the pricing models in turn.