Bid, Ask, and Spread
Definition
Bid = highest buy price; Ask = lowest sell price; Spread = Ask − Bid. Narrow spreads usually indicate better liquidity.
Components
Bid (Buy Price)
The highest price a buyer is currently willing to pay for a contract.
Ask (Sell Price)
The lowest price a seller is currently willing to accept for a contract.
Spread
The difference between the ask and bid prices:
Spread = Ask Price − Bid Price
Example
Market: "Will GDP grow by 3%?"
- Bid: $0.62 (highest buyer offer)
- Ask: $0.65 (lowest seller offer)
- Spread: $0.03 (3¢)
Why Spreads Matter
Liquidity Indicator
- Narrow spread (1-2¢): High liquidity, easy to trade
- Wide spread (5-10¢+): Low liquidity, harder to trade
Trading Costs
The spread represents an implicit cost:
- Buying at ask and immediately selling at bid = instant loss equal to the spread
- Market makers profit from capturing the spread
Price Uncertainty
Wide spreads indicate:
- Disagreement about true probability
- Low trading volume
- Market uncertainty
Trading Strategies
Market Takers
Accept the spread by:
- Buying at the ask (paying more)
- Selling at the bid (receiving less)
- Get instant execution
Market Makers
Profit from the spread by:
- Posting limit orders on both sides
- Buying at bid, selling at ask
- Providing liquidity to other traders