Bid-Ask Spreads and Liquidity in US Equities

Every stock you buy costs more than the quoted price, and every stock you sell fetches less — the bid-ask spread is a transaction tax hiding in plain sight. For a portfolio of S&P 500 stocks, that cost runs approximately 4.5 basis points per trade (Nasdaq research, 2024). For small-cap or illiquid names, it can exceed 50 basis points per round trip. The move: learn to read spreads before you trade, use limit orders when spreads are wide, and time your executions to avoid the worst liquidity windows.

TL;DR: The bid-ask spread is the difference between what buyers will pay and what sellers will accept. It's a direct cost on every trade. Wider spreads mean higher costs and lower liquidity — know the spread before you click "buy."

What the Bid, Ask, and Spread Actually Are (The Building Blocks)

The bid price is the highest price a buyer is currently willing to pay for a security. The ask price (also called the offer) is the lowest price a seller is currently willing to accept. Both are displayed in real time on exchange order books.

The bid-ask spread is the difference: Ask − Bid. When you place a market order to buy, you pay the ask. When you sell, you receive the bid. That gap is your immediate transaction cost.

The midpoint price — (Bid + Ask) / 2 — serves as the reference price for measuring execution quality. If you buy at a price better than the ask (closer to the midpoint), that's called price improvement. Wholesalers frequently provide sub-penny price improvement on retail orders.

The point is: the spread isn't an abstract concept. It's money leaving your account on every trade. A $0.05 spread on 100 shares means you overpay by $2.50 versus the midpoint when you buy, and receive $2.50 less than the midpoint when you sell — $5.00 total round-trip cost.

How Wide Spreads Get (And What That Tells You)

Spread width varies enormously depending on the stock. Here's what the data shows:

Why this matters: a spread of 1 basis point on Apple is a rounding error. A spread of 100 basis points on a thinly traded small-cap means you're paying 1% just to get in — and another 1% to get out. That's 2% gone before the stock moves a penny in your favor.

The National Best Bid and Offer (NBBO) aggregates the best bid and best ask across all US exchanges, as required by SEC Regulation NMS. Your broker must execute your order at or better than the NBBO. But "at or better" still means you're paying the spread (unless you get price improvement).

The Tick Size Floor (Why Spreads Can't Go Below a Penny — Usually)

The minimum tick size — the smallest increment at which a stock can be quoted — is $0.01 for most US equities priced above $1.00. This means the tightest possible quoted spread is one penny.

For the most liquid stocks (AAPL, MSFT, and similar names trading billions of dollars daily), the spread sits at that $0.01 floor almost continuously. The tick size is effectively the binding constraint, not supply and demand.

The SEC recognized this mismatch. In October 2024, the SEC adopted a new rule introducing a $0.005 (half-penny) minimum tick for qualifying NMS stocks with a time-weighted average quoted spread of $0.015 or less. This rule took effect November 3, 2025. The SEC also reduced the access fee cap from $0.0030 to $0.0010 per share.

The point is: for the most liquid stocks, the old penny tick was artificially wide. The half-penny tick lets spreads narrow further — reducing your transaction costs on high-volume names.

Liquidity: More Than Just the Spread

Liquidity is the ability to buy or sell a security quickly and in size without causing a significant price impact. Spread width is one measure, but it's not the only one.

Market depth — the total number of shares available at the bid and ask prices (and nearby price levels) — determines how much you can trade at the quoted price. If the spread is $0.01 but only 100 shares sit at each level, a 5,000-share order will blow through multiple price levels and your effective spread will be much wider than the quoted spread.

The effective spread captures this reality: 2 × |Trade Price − Midpoint|. It measures what you actually paid relative to the midpoint, including any slippage or price improvement.

US equity markets traded an average of 9.8 billion shares per day in single stocks plus 2.4 billion shares in ETFs (totaling 12.2 billion shares daily) in 2024, according to SIFMA. That aggregate volume masks enormous variation — the top 50 names account for a disproportionate share of that liquidity, while thousands of smaller stocks trade under 100,000 shares per day.

The test: if your order size exceeds 10% of displayed depth at the NBBO, expect market impact. Consider splitting the order or using an algorithmic execution strategy.

Worked Example: Two Stocks, Two Very Different Costs

Stock A — Large-cap at $150:

• Bid: $149.98 / Ask: $150.01
• Spread: $0.03 (2 basis points)
• You buy 100 shares at the ask: cost = $15,001.00
• Midpoint was $149.995, so you "overpaid" by $0.015 per share
• One-way spread cost on 100 shares: $1.50 (overpayment vs midpoint)
• Full round-trip cost (buy at ask, sell at bid): $3.00

Stock B — Small-cap at $50:

• Bid: $49.95 / Ask: $50.00
• Spread: $0.05 (10 basis points)
• You buy 100 shares at the ask: cost = $5,000.00
• Midpoint was $49.975, so you "overpaid" by $0.025 per share
• One-way spread cost on 100 shares: $2.50
• Full round-trip cost (buy at ask, sell at bid): $5.00

Stock B's spread is 5× wider in basis-point terms. On a $5,000 position, $5.00 round-trip doesn't sound catastrophic — but if you trade this name 10 times a year, that's $50 in spread costs alone (on a position that may only generate $200–$500 in annual return). Spread costs compound into a meaningful drag on small, frequently traded positions.

The practical point: Check the quoted spread before every trade. For Stock A, a market order is fine — the spread is tight and depth is deep. For Stock B, place a limit order at or near the midpoint ($49.975 or $49.98) and wait.

Settlement note: After execution, US equities settle on a T+1 basis (one business day after trade date) since May 28, 2024, reduced from the prior T+2 cycle. Your cash or shares transfer the next business day.

When Spreads Blow Out (Stress Events and Timing)

Spreads are not static. They widen — sometimes dramatically — during market stress and at predictable times of day.

Intraday pattern: Spreads are typically 2–5× wider in the first and last 15 minutes of the trading session compared to the midday average. Market makers quote wider to protect themselves during periods of higher uncertainty (around the open, when overnight information is being priced in, and around the close, when large institutional orders cluster).

Market stress — March 2020: During the COVID-19 selloff, bid-ask spreads in equities and Treasuries widened to their highest levels since the 2007–09 financial crisis. Spread widening peaked March 13–16, 2020. The S&P 500 fell 7.6% on March 9, triggering a Level 1 circuit breaker (a 15-minute trading halt). Markets declined over 30% peak-to-trough from February 19 to March 23 (Federal Reserve FEDS Notes, September 2020).

The critical point: liquidity disappears precisely when you need it most. During calm markets, spreads are tight and execution is cheap. During panic, spreads widen, depth evaporates, and market orders can fill at prices far from the last quoted midpoint. This is not a bug — it's how markets price uncertainty.

Detection signals — you're likely getting hurt by wide spreads if:

• You trade small-cap stocks with average daily volume below 100,000 shares (these often carry spreads above 50 basis points)
• You routinely place market orders at 9:30 AM or 3:55 PM
• You notice your fill prices consistently differ from the price you saw when you clicked "buy"
• You trade during earnings announcements or major macro events without checking the spread first

How Decimalization Changed Everything (Historical Context)

Before 2001, US stocks were quoted in fractions — sixteenths of a dollar ($0.0625) on the NYSE. The minimum spread was wide by today's standards.

Decimalization → Narrower spreads → Lower costs for investors

The NYSE converted to decimal pricing on January 29, 2001; NASDAQ followed on April 9, 2001. The results were substantial: NASDAQ total trading costs fell approximately 50%, from 14.6 cents per share to 7.4 cents per share between Q2 2001 and Q4 2004 (GAO Report GAO-05-535). Major broker-dealers including Goldman Sachs, Morgan Stanley, and Merrill Lynch reported substantial declines in equity trading revenue — which was the flip side of lower costs for investors.

The SEC later ran a Tick Size Pilot Program (2016–2018) that tested wider tick sizes for small-cap stocks. The results showed that wider tick sizes deteriorated price efficiency — confirming that narrower ticks generally benefit investors. Those findings informed the 2025 half-penny tick rule for liquid stocks.

The point is: market structure changes directly affect your trading costs. Decimalization → half-penny ticks is a multi-decade trend toward tighter spreads and lower friction. But these benefits accrue mainly to liquid, large-cap stocks. Small-cap spreads remain wide.

Spread-Smart Trading Checklist

Essential (high ROI) — these prevent 80% of unnecessary spread costs:

• Check the quoted spread before every trade. If it exceeds $0.05 or 10 basis points (whichever is wider), use a limit order at or near the midpoint
• Avoid market orders on stocks with average daily volume below 100,000 shares. These names carry spreads above 50 basis points — a limit order is mandatory
• Don't trade in the first or last 15 minutes unless you have a specific reason. Midday spreads are typically 2–5× tighter
• Compare your fill price to the midpoint at time of execution. Your broker's trade confirmation should show this. Consistent slippage means you're paying more than you think

High-impact (workflow improvements):

• Check depth, not just the spread. If your order exceeds 10% of displayed shares at the NBBO, split it or use an algo
• Use the effective spread (2 × |Fill − Midpoint|) to measure true cost. The quoted spread is the starting point; the effective spread is what you actually paid
• Review your broker's execution quality reports (required under SEC Rule 606). Look for price improvement rates and effective spread statistics
• Know the settlement timeline: T+1. Your trade settles one business day after execution — plan cash needs accordingly

Optional (valuable for active traders):

• Track spread costs as a line item in your trading journal. Multiply spread × shares × number of trades to see annual impact
• For portfolios tilted toward small-cap or illiquid names, budget for higher spread costs and trade less frequently
• Watch for the half-penny tick impact on your most-traded liquid names — tighter spreads on qualifying stocks reduce your costs automatically

Your Next Step

Do this today: Open your brokerage platform, pull up a stock you own or plan to buy, and look at the bid-ask spread. Calculate the spread in cents and in basis points (spread ÷ midpoint × 10,000). If the spread exceeds 10 basis points, set a limit order at the midpoint rather than using a market order on your next trade. Track your fill price versus the midpoint for your next five trades — that's your real transaction cost, and knowing it is the first step to controlling it.

For more on how orders interact with market structure, see Order Types Used by US Investors. To understand who's on the other side of your trade, see Market Makers, Specialists, and Wholesalers.

Sources: SEC Market Structure Analytics; GAO Report GAO-05-535 (2005); Federal Reserve FEDS Notes (September 2020); SIFMA US Equity Market Structure Compendium (2024); FINRA investor education resources.