#Definition
The bid-ask spread (or simply "spread") is the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask). This gap represents the cost of executing a trade immediately rather than waiting for a better price.
In prediction markets, the spread is both a trading cost and an information signal. Narrow spreads indicate liquid, actively traded markets where participants largely agree on probability. Wide spreads suggest thin liquidity, significant uncertainty, or limited market maker activity.
#Why It Matters in Prediction Markets
The spread directly impacts trading profitability and market interpretation.
Transaction cost: Every immediate trade crosses the spread. Buying at the ask and later selling at the bid means losing the spread amount regardless of whether your prediction was correct. A 5-cent spread on a $0.50 contract represents a 10% round-trip cost.
Break-even calculation: When buying Yes shares at the ask price of $0.55, the event must occur more than 55% of the time to profit; not 50%, not the mid-price. The spread raises the bar for profitable trading.
Liquidity signal: Tight spreads (1-2 cents) indicate deep liquidity and active market makers. Wide spreads (10+ cents) warn of thin markets where execution may be difficult and displayed probabilities less reliable.
Probability uncertainty: A market showing 48-52 cents (4-cent spread) has reasonably confident pricing. A market showing 40-60 cents (20-cent spread) reflects genuine disagreement about the true probability.
#How It Works
#Spread Components
Best Bid: $0.48 (highest price buyers will pay)
Best Ask: $0.52 (lowest price sellers will accept)
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Spread: $0.04 (ask minus bid)
Mid-Price: $0.50 (average of bid and ask)
#Visualizing the Spread
The "Gap" is where no trades happen. To trade now, you must cross the gap to meet the other side.
#Calculating Spread Percentage
The spread can be expressed as a percentage of the mid-price:
Spread % = (Ask - Bid) / Mid-Price × 100
Example: ($0.52 - $0.48) / $0.50 × 100 = 8%
An 8% spread means round-trip trading costs approximately 8% of position value.
#Market Maker Economics
Market makers profit from the spread by continuously offering to buy and sell:
Market maker posts:
Bid: $0.48 (willing to buy)
Ask: $0.52 (willing to sell)
When a buyer pays $0.52 and a seller accepts $0.48:
Market maker earns: $0.52 - $0.48 = $0.04 per share
This spread compensates market makers for:
- Capital commitment (inventory risk)
- Adverse selection (trading against better-informed participants)
- Operational costs
#Spread vs. Fees
It is crucial to distinguish Spread from Fees:
| Feature | Spread | Fees |
|---|---|---|
| Who gets it? | Market Maker (or counterparty) | The Platform (Exchange) |
| Visibility | Implicit (difference between prices) | Explicit (line item on trade) |
| Avoidable? | Yes, by using Limit Orders | No (usually mandatory) |
| Dynamic? | Yes, changes every second | No, usually fixed % |
Total Cost of Trading = Spread + Fees.
#Numerical Example: Impact on Returns
You believe an event has 60% probability. The market shows:
- Bid: $0.45
- Ask: $0.55
- Mid-price: $0.50
Buying at the ask ($0.55):
Expected value = (0.60 × $1.00) + (0.40 × $0.00) - $0.55
= $0.60 - $0.55 = +$0.05 per share
If you could buy at mid-price ($0.50):
Expected value = $0.60 - $0.50 = +$0.10 per share
The spread cuts your expected profit in half.
#Examples
#Example 1: Liquid Election Market
A major election market shows:
- Bid: $0.64 (640,000 shares)
- Ask: $0.65 (580,000 shares)
- Spread: $0.01 (1.5%)
The penny spread indicates intense competition among market makers and high trader interest. Large orders can execute with minimal friction. The tight spread also suggests strong consensus around the ~65% probability estimate.
#Example 2: Illiquid Policy Market
A niche regulatory market shows:
- Bid: $0.35 (200 shares)
- Ask: $0.50 (150 shares)
- Spread: $0.15 (33%)
The wide spread reflects multiple problems: few participants, no dedicated market makers, and genuine uncertainty about the outcome. A trader buying at $0.50 needs the event to occur 50% of the time just to break even, far above the mid-price "probability" of 42.5%.
#Example 3: Spread Widening Before News
An interest rate decision market normally shows:
- Spread: $0.02 (2%)
One hour before the Fed announcement:
- Spread: $0.10 (12%)
Market makers widen spreads to protect against the risk of being on the wrong side when the announcement hits. After the decision, spreads return to normal within minutes.
#Example 4: Spread as Opportunity
A binary market shows:
- Yes bid: $0.40
- Yes ask: $0.45
- No bid: $0.52
- No ask: $0.58
Notice: 0.52 (No bid) = 0.45 and No at 1.03 for a guaranteed $1.00 payout, which is not profitable. But occasionally, pricing inefficiencies create arbitrage opportunities when spreads misalign.
#Risks and Common Mistakes
Ignoring spread in expected value calculations
Many traders calculate edge using the mid-price, then execute at the ask. This systematically overstates profitability. Always use the actual execution price (ask for buying, bid for selling) in EV calculations.
Assuming the mid-price is "fair value"
The mid-price is just the average of bid and ask, not an objective measure of true probability. In thin markets, the mid-price may reflect the last random trade rather than informed consensus.
Trading frequently in wide-spread markets
Each trade incurs the spread cost. Active trading in markets with 10% spreads rapidly depletes capital even with accurate predictions.
Overlooking spread when comparing prices across platforms
A market showing 52% probability on one platform with 2% spreads may offer better execution than a 50% probability market with 8% spreads on another platform.
Panic trading during spread widening
Spreads widen during volatility precisely when traders feel most compelled to act. Waiting for spreads to normalize often produces better execution.
#Practical Tips for Traders
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Use limit orders to avoid paying the full spread: Post orders inside the spread to potentially get better prices, though fills aren't guaranteed
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Compare spread-adjusted prices across platforms: The platform with the tightest spread often offers the best effective price
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Factor round-trip costs: If you plan to exit before resolution, double the spread to estimate total transaction costs
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Avoid wide-spread markets for short-term trades: Spreads above 5% make profitable trading very difficult unless you have significant edge
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Trade when spreads are tightest: Spreads typically narrow during high-volume periods when market makers compete more aggressively
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Watch for spread compression near events: As uncertainty resolves, spreads often tighten, improving execution for late trades
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Set spread alerts: Some platforms notify you when spreads narrow to target levels
#Related Terms
#FAQ
#What is a "good" spread in prediction markets?
It depends on your trading style. For active traders, spreads under 2% are desirable. For position traders holding to resolution, spreads up to 5% may be acceptable if the edge is large enough. Spreads above 10% typically indicate markets too thin for meaningful trading.
#Why do spreads vary so much between markets?
Spreads reflect liquidity, uncertainty, and market maker activity. High-profile events attract more market makers and traders, compressing spreads. Niche markets with few participants and no professional liquidity providers naturally have wider spreads.
#How does the spread relate to implied probability?
The bid implies the market's minimum probability estimate; the ask implies the maximum. A bid of 0.55 means the market believes the probability is somewhere between 45% and 55%. The mid-price (50%) is only a rough approximation.
#Visualizing the Spread
Imagine an order book for a "Yes" share:
| Price | Quantity | Type |
|-------|----------|-----------|
| $0.62 | 500 | Ask (Sell)| <-- Lowest price someone will sell for
| $0.61 | 200 | Ask (Sell)|
|-------|----------|-----------| <-- SPREAD ($0.01)
| $0.60 | 1000 | Bid (Buy) | <-- Highest price someone will buy for
| $0.59 | 500 | Bid (Buy) |
If you want to buy immediately, you must pay 0.60.
#Spread as a Cost
The spread functions as a hidden transaction fee. If you buy at 0.60, you lose 0.50 / Ask $0.70), this cost is massive, making it hard to profit.
#Can I profit from the spread like a market maker?
Yes, by posting limit orders on both sides, but it requires capital, risk management, and dealing with adverse selection. When you're consistently filled on one side but not the other, it often means informed traders are picking off your quotes. Professional market making is more complex than simply collecting the spread.
#Do AMM-based markets have spreads?
AMMs don't have traditional bid-ask spreads since there's no order book. Instead, they have an equivalent concept: the price difference between buying and selling small amounts. This "effective spread" is determined by the pool's fee structure and the bonding curve formula.