Bid/Ask Spread

What is bid ask spread?

The bid ask spread is the difference between the price at which a market maker is willing to buy a currency (the bid) and the price at which they are willing to sell it (the ask).

The bid ask spread is a crucial indicator of a currency pair’s liquidity and transaction costs in FX trading. It is influenced by factors like market liquidity, volatility, and trading conditions. A narrower bid ask spread typically signals high liquidity, while a wider spread indicates lower liquidity or higher risk.

 

Bid ask spread formula

Bid ask spread = Ask price - Bid price

Bid price: The price at which a buyer is willing to purchase an asset.

Ask price: The price at which a seller is willing to sell an asset.

Spread: The difference between the bid price and the ask price.

 

Bid ask spread example

The bid ask spread is calculated by subtracting the bid price from the ask price: Bid Ask spread = Ask price – Bid price.

In FX trading, spreads are usually measured in pips (percentage in points), the smallest unit of price movement in a currency pair.

Example (EUR/GBP):
A business looking to purchase €1,000,000 and sell GBP is quoted the following exchange rates:

• Sell EUR / Buy GBP: 0.8575
• Buy EUR / Sell GBP: 0.8576

Calculation:
0.8576 – 0.8575 = 0.0001, or 1 pip.

 

Bid ask spread and liquidity

The bid ask spread is one of the clearest indicators of market liquidity:

Narrow spreads = high liquidity.
When a market has many active buyers and sellers, currency pairs can be traded quickly and in large volumes without moving the price. This results in tighter spreads.

Wide spreads = low liquidity.
In less liquid markets, or during periods of uncertainty, there are fewer participants and less competition between market makers. This leads to wider spreads and higher trading costs.

 

Why is the bid ask spread important?

Measures market liquidity

A narrow spread generally indicates high liquidity of a currency pair, meaning there are many buyers and sellers actively trading. A wide spread suggests lower liquidity, which is more common in less-traded pairs or during volatile market conditions.

Reflects FX transaction costs

The spread is effectively the cost of executing a trade, it represents the implicit cost of buying and selling a currency pair in the FX market, which ultimately impacts the profitability of a trade and bottom lines. For corporates and fund managers with large or frequent transactions, even small differences in spread can significantly affect the bottom line.

Indicates market efficiency

Narrow spreads usually occur in efficient markets with strong competition among traders, where information is quickly absorbed into prices. Wider spreads may reflect inefficiencies, higher perceived risk, or limited competition among market makers.

Helps evaluate pricing

The spread provides insight into demand and supply dynamics of a particular currency pair. For example, if the spread widens sharply, it can be a signal of reduced liquidity, or heightened risk aversion in the market.

 

What impacts the bid ask spread?

Volatility

Period of high market volatility often causes the bid ask spread to widen. Greater uncertainty increases risk for liquidity providers, who compensate by quoting less competitive prices.

Trading volume

Large and consistent trading volumes typically lead to narrow spreads, as increased market participation and competition enhance the liquidity of a currency pair. Conversely, thinly traded pairs usually face wider spreads.

Market conditions

Macroeconomic data releases, central bank decisions, or geopolitical events can sharply impact spreads by triggering sudden changes in supply and demand.

Asset classes

Different asset classes and currency pairs tend to have varying spreads. Major currencies such as GBP and USD typically have tight spreads due to their high liquidity and heavy trading volumes. In contrast, exotic currencies usually face wider spreads because they are less liquid and trade less frequently.

 

Impact of bid ask spreads on trading costs

The bid ask spread is effectively a hidden cost of FX trading. Even if you’re not paying an explicit commission, the spread—the gap between the price you buy at (ask) and the price you sell at (bid)—can still impact your costs in several ways.

Direct cost of execution

Every trade made absorbs the spread. A wider spread means starting at a disadvantage, which can eat into profit margins.

Impact on high frequency or large trades

For corporates and asset managers executing frequent or high volume FX transactions, small differences in spreads can add up quickly, significantly affecting bottom lines.

Market conditions and timing matter

Spreads tend to widen during periods of market volatility or low liquidity, like off-peak trading hours. This makes trades more expensive. Being strategic about when and with whom you trade can help reduce these costs.

Importance of best execution

Having access to multiple liquidity providers on a centralised platform and using tools like Transaction Cost Analysis (TCA) can help you secure tighter spreads, reduce costs, and improve your trading outcomes.

 

Optimising bid ask spreads in trading strategies

Transaction Cost Analysis (TCA)

TCA is essential for understanding bid ask spreads by providing detailed insights into trading costs. TCA evaluates factors like price impact, liquidity, and trade timing to determine how the bid ask spread affects overall transaction costs.

By analysing both historical and real-time data, TCA helps traders identify cost-saving opportunities, optimise execution strategies, and helps to improve overall trade performance—especially in markets with wide or volatile spreads. This increased cost transparency enables businesses and asset managers to make more informed decisions, reduce unnecessary costs, and boost trading efficiency.

Counterparty diversity for tighter bid ask spreads

FX risk management providers like MillTech give clients access to up to 15 tier-one counterparty banks, ensuring competitive rates from multiple banks. This access helps achieve tighter bid ask spreads and better overall pricing through best execution. When combined with advanced analytics tools like Co-Pilot, MillTech empowers asset managers and corporates to make smarter, more cost-effective decisions, even in volatile market conditions.