Spread Widening: Why Costs Spike Near News and Expiration
What spread widening is
Spread widening is when the bid ask spread increases, often quickly. When spreads widen, execution costs rise and fills become less predictable.
In prediction markets, spread widening is common near major news, near expiration, and during fast price moves.
Why spreads widen
Spreads are set by liquidity providers and other resting orders. When risk increases, those quotes move away from the midpoint or disappear.
Common drivers:
• Information risk: new information may arrive at any moment.
• Adverse selection: market makers fear trading against better informed traders.
• Inventory risk: providers do not want to hold exposure during volatile moments.
• Low competition: fewer providers means wider spreads can persist.
Three situations where widening is most likely
1) Around major news
When news is expected, liquidity pulls back before the event. Spreads widen because providers do not want to be picked off the moment information hits.
2) Near expiration
As expiration approaches, outcomes become more sensitive to last minute updates. Markets can become jumpy and depth can collapse.
3) During fast price moves
When prices move quickly, quotes lag. Widening is a natural response while the book re-prices.
How to spot spread widening early
Signals you can observe in real time:
• Spread increases and stays high for multiple updates.
• Top of book depth shrinks or disappears.
• Quotes flicker: bid and ask move rapidly or reset.
• You see more partial fills and worse VWAP for the same size.
Why widening matters for cost metrics
When spreads widen, both snapshot and realized costs rise:
• Quoted spread rises immediately.
• Effective spread often rises even more because slippage and price impact increase.
That is why costs can spike faster than most traders expect.
What to do when spreads widen
Reduce size
Lower size reduces impact and makes it easier to execute near the top of book.
Switch from market to limit
In widening regimes, market orders are the most expensive tool. Prefer limit orders to cap worst-case price.
Avoid peak uncertainty windows
If you can, avoid trading immediately before known announcements and in the last minutes before expiration.
Require a liquidity check
Use a liquidity checklist before entering. If widening is active, treat the market as not tradable at normal size.
Worked example
Normal conditions:
• bid 48c, ask 52c, spread 4c
Stress conditions:
• bid 45c, ask 55c, spread 10c
If you enter and exit during stress, you pay this wider spread twice. Even if you are right on direction, costs can eat the profit.
Common mistakes
Trading more because it feels urgent: urgency often coincides with worst liquidity.
Using market orders into widening spreads: you lock in high cost.
Ignoring exit liquidity: widening often continues and exits become more expensive.
Not measuring realized cost: track effective spread and VWAP to see the full impact.
Takeaway
Spread widening is a predictable liquidity response to uncertainty. Treat widening as a warning: reduce size, switch order types, or wait. Most strategies fail in prediction markets not because the prediction is wrong, but because execution costs spike at the worst time.
Related
• Liquidity Checklist: How to Tell If a Market Is Tradable