Effective Spread vs Quoted Spread: What’s the Difference
The short version
Quoted spread is the gap you see in the order book at a moment in time.
Effective spread is the cost you actually paid based on your fill relative to the midpoint at the time of the trade.
If you care about real execution costs, effective spread is the better metric. If you care about market conditions right now, quoted spread is still useful.
Definitions
Quoted spread
Quoted spread (QS) = best ask - best bid.
This is a snapshot number. It describes the current top of book, not your realized fill quality.
Effective spread
Effective spread (ES) measures how far your execution was from the midpoint:
ES = 2 × |Pexec - M|
• Pexec is your execution price (use VWAP if you had multiple fills).
• M is the midquote at the time of the trade.
Why quoted spread can lie
Quoted spread can look small even when your realized costs are large. Typical reasons:
• Thin depth at top of book: you consume the best price level quickly and slip into worse levels.
• Partial fills: you get some size at the best level, the rest at worse prices.
• Fast moving quotes: by the time your order hits, the book changed.
• Spread widening: spreads can widen around news or near expiration.
When quoted spread is still useful
Quoted spread is great for:
• Quick liquidity screening (is this market tradable right now?).
• Comparing markets at the same time snapshot.
• Spotting stress: sudden jumps often mean spreads widening or liquidity pulling.
When effective spread is the better metric
Effective spread is what you want for:
• Measuring your execution quality after the trade.
• Comparing execution across markets, sizes, and times.
• Quantifying the cost gap between what you saw and what you got.
How to use both together
A clean workflow looks like this:
• Log QS at trade time (best bid and ask from the same snapshot).
• Compute ES from fills and the midquote.
• Track ES vs QS. When ES is consistently higher than QS, your fills are worse than the book suggests.
Worked examples
Example A: ES about equals QS
• bid = 48c, ask = 52c, midquote = 50c
• you buy at 52c
• QS = 4c, ES = 4c
Interpretation: you crossed the spread and filled at the ask.
Example B: ES lower than QS (price improvement)
• bid = 48c, ask = 52c, midquote = 50c
• you buy at 51c
• QS = 4c, ES = 2c
Interpretation: you were filled inside the spread.
Example C: ES higher than QS (thin depth, slippage)
• bid = 48c, ask = 52c, midquote = 50c
• you buy size and your VWAP is 52.4c
• QS = 4c, ES = 4.8c
Interpretation: you paid more than the spread suggests because depth was limited.
Common mistakes
Using last price as midpoint: last trade is not the midpoint. Use midquote.
Bid and ask from different timestamps: you fake the midpoint and distort ES.
Ignoring fees: ES is execution only. Add fees separately into all in cost.
Ignoring exits: strategy depends on round trip cost, not just entry.
Practical takeaway
Use quoted spread for market screening and effective spread for performance measurement. Then combine both with fees to get the only number that matters: all in cost.