Every market shows you two prices, not one. There’s the price you can sell at and the price you can buy at, and they’re never quite the same. The gap between them is the spread, and it’s a cost you pay on every single trade whether or not the trade works out. Most beginners glance past it, then wonder why a position that’s barely moved is already showing a small loss. That small loss is the spread.
The short version: the bid is the highest price a buyer will pay, the ask is the lowest price a seller will accept, and the spread is the difference between them. You buy at the ask and sell at the bid, so you start every trade slightly behind by the size of the spread. On liquid instruments in busy hours that gap is tiny; on thin instruments or around news it can balloon. Here’s how it works and why it matters more in a prop account than you might think.
What the Bid and Ask Are
The bid price is the most a buyer is currently willing to pay for an asset. It’s the price you sell at, and it sits just below the mid-market price. The ask price, also called the offer, is the least a seller is willing to accept. It’s the price you buy at, and it sits just above the mid. When you place a market order to buy, you take the ask; when you sell, you hit the bid.
Both prices come from the orders that buyers and sellers, including market makers, post into the order book. They shift constantly with supply, demand, and how much activity the market is seeing.
What the Spread Is
The spread is simply the ask minus the bid, and it represents the built-in cost of trading the asset. As a rule, the tighter the spread, the more liquid and actively traded the instrument is. You can also read it as a percentage with the formula (ask − bid) ÷ ask × 100. If the ask is 10.05 and the bid is 10.00, the spread is 0.05, or about 0.5%.
The key thing to absorb is that the spread is a cost you pay twice, once when you enter and once when you exit, and it’s charged through the price itself rather than billed separately like a commission.
How the Spread Is Quoted
The unit changes by market, but the idea is identical. In forex, spreads are measured in pips, usually the fourth decimal place (the second for JPY pairs). A GBP/USD quote with a bid of 1.26572 and an ask of 1.26583 shows a spread of about 1.1 pips. In futures, spreads are measured in ticks or points. The E-mini S&P 500 (ES) trading 6000.00 bid and 6000.25 ask has a 0.25-point spread, which is one tick worth $12.50 per contract, so a round trip in and out costs about $25 regardless of whether the trade wins. Micro contracts keep the same tick spread but a smaller dollar value, so a Micro E-mini’s 0.25-point spread is $1.25 rather than $12.50. Stocks and indices quote the spread in points or the smallest price increment for that market. For more on why exchange-traded futures and broker-quoted CFDs price differently, see our guide to futures versus CFDs.
Why the Spread Exists
The spread is the compensation market makers and liquidity providers earn for standing ready to take the other side of your trade and carry the inventory risk that comes with it. On a centralized futures exchange like the CME, the exchange itself doesn’t set the spread; it provides the venue and clearing while the actual prices come from the buy and sell orders participants place in the order book. When lots of participants compete, the spread narrows. When they step back, it widens. Watching the order book directly, through Level 2 market data, shows you exactly where those bids and offers are stacked.
What Makes the Spread Widen or Tighten
A handful of forces move the spread, and they tend to push in predictable directions.
| Factor | Tighter spread | Wider spread |
|---|---|---|
| Liquidity | High liquidity, many participants | Thin liquidity |
| Volatility | Calm conditions | Fast, volatile conditions |
| Time of day | Peak session hours | Overnight and off-hours (often 2 to 4 times wider) |
| Instrument | Majors, large caps, front-month futures | Exotics, small caps, deferred futures months |
| News | Quiet periods | During and around major releases |
Volatility is the big one to plan around. When a major release like Non-Farm Payrolls or a Fed rate decision hits, market makers widen spreads to protect themselves from sudden price swings, so even a normally one-tick contract like ES can briefly blow out past its usual spread. Liquidity and timing matter just as much: the same instrument is cheap to trade at peak hours and noticeably more expensive overnight.
How the Spread Costs You
Because you buy at the ask and sell at the bid, every position opens at a small loss equal to the spread, and the market has to move in your favor by that much before you’re even at break-even. For someone making a few trades a week, that’s minor. For an active day trader placing 20 trades a day, spread costs stack up fast and can quietly consume a real share of profits. The cost also scales with size, so larger positions and multiple simultaneous positions multiply it. It’s worth noting that for active futures traders, spread costs often exceed commissions, since a commission might be well under a dollar per contract while the spread on a round trip can be $25 or more.
Why the Spread Matters in a Prop Account
In an evaluation or funded account, the spread isn’t just a trading cost, it interacts with your rules. From the first tick, the spread puts you slightly underwater, which counts toward your floating loss and therefore nudges you toward your drawdown limits, and it eats into the profit you need to reach your target. For a high-frequency or scalping strategy, where each trade aims for only a few ticks, the spread can be the difference between an edge and a loss once you tally it across hundreds of trades.
Two prop-specific points are easy to miss. First, because most prop accounts are simulated, the spread you actually pay is set by the firm’s pricing and execution model, not by a live exchange, so it pays to test how a firm behaves in fast conditions before you rely on tight fills. Second, the spread widens exactly when you might be tempted to trade news, which is part of why news scalping is so punishing, and wider spreads also drag stop-loss fills to worse prices than you expected.
How to Manage Spread Costs
You can’t avoid the spread entirely, but you can keep it small. Trade liquid instruments, major pairs, large-cap names, and front-month futures, where competition keeps spreads tight. Trade during peak session hours rather than thin overnight periods. Use limit orders in volatile or wide-spread conditions instead of paying the full spread with a market order. Steer clear of entering right at major news or the market open and close, when spreads are at their widest. And before any trade, glance at the live spread and fold it into your reward-to-risk math, so a strategy that looks profitable on paper still is once the cost of entry and exit is counted.
Bottom Line
The spread is the price of admission on every trade, the gap between what you can buy at and sell at, and you pay it on the way in and again on the way out. It’s barely noticeable on liquid instruments during busy hours and genuinely costly on thin ones or around news. In a prop account it does double duty as a hidden tax on your profit target and a quiet contributor to your drawdown, so the smart approach is the same in any market: trade liquid instruments, time your entries well, and price the spread into every decision rather than discovering it after the fact.
Frequently Asked Questions
What’s the difference between the bid and the ask?
The bid is the highest price a buyer will currently pay, and it’s the price you sell at. The ask, or offer, is the lowest price a seller will accept, and it’s the price you buy at. The ask is always slightly higher than the bid.
What is the spread in simple terms?
It’s the difference between the buy price and the sell price, and it’s the cost of trading an asset. You pay it built into the price every time you open and close a position.
How is the spread measured?
It depends on the market. Forex uses pips, futures use ticks or points, and stocks and indices use points or the smallest price increment. For example, a one-tick spread on the E-mini S&P 500 is 0.25 points, or $12.50 per contract.
Why do spreads widen during news?
Market makers widen spreads around major releases to protect themselves from sudden, unpredictable price moves. With more risk in holding inventory, they quote less aggressively, so even normally tight instruments can see their spread expand for a short time.
Does the spread count against me in a prop challenge?
Yes. You start each trade down by the spread, which adds to your floating loss and counts toward your drawdown, while also reducing the profit available toward your target. It matters most for high-frequency and scalping strategies that take many trades.
How can I pay less spread?
Trade liquid instruments during peak hours, use limit orders in volatile conditions, and avoid entering right at major news or the market open and close. Checking the live spread before you trade and building it into your risk math also helps.