#Definition
The spread (or bid-ask spread) is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). In prediction markets, the spread represents the cost of immediate execution and serves as a key indicator of market liquidity.
A narrow spread means you can trade cheaply; a wide spread means trading is expensive. Understanding spreads is essential for evaluating whether a trading opportunity is profitable after accounting for transaction costs.
#Why It Matters in Prediction Markets
Spreads affect every aspect of prediction market trading:
Transaction costs
Every trade crosses the spread. If you buy at the ask and immediately sell at the bid, you lose the spread amount. This cost must be factored into every trading decision.
Liquidity indicator
Narrow spreads indicate healthy markets with many participants. Wide spreads suggest thin markets where finding counterparties is difficult.
Edge calculation
Your expected profit must exceed the spread for a trade to be worthwhile. A 2% edge in a market with a 3% spread is still a losing trade.
Market maker compensation
The spread is how market makers earn profit for providing liquidity. They buy at the bid and sell at the ask, capturing the spread on each round-trip.
#Visualizing the Spread
#How It Works
#Basic Calculation
Spread = Ask Price - Bid Price
Percentage spread (useful for comparison):
Spread % = (Ask - Bid) / Midpoint × 100
Midpoint price:
Midpoint = (Bid + Ask) / 2
#Numerical Example
A market on whether a bill passes shows:
- Bid: $0.48 (best buy offer)
- Ask: $0.52 (best sell offer)
Calculations:
Spread = $0.52 - $0.48 = $0.04 (4 cents)
Midpoint = ($0.48 + $0.52) / 2 = $0.50
Spread % = $0.04 / $0.50 × 100 = 8%
Impact on trading:
- Buying requires paying $0.52 (ask price)
- Selling receives $0.48 (bid price)
- Round-trip cost: $0.04 per share
If you believe true probability is 55%, the midpoint (0.52 means you need the true probability to exceed 52% just to break even.
#Spread Width Interpretation
| Spread % | Liquidity | Typical Situation |
|---|---|---|
| < 1% | Excellent | Major markets, high volume |
| 1-2% | Good | Active markets, reasonable for trading |
| 2-5% | Moderate | Some friction, factor into decisions |
| 5-10% | Poor | Thin market, significant trading cost |
| > 10% | Very poor | Illiquid, avoid or use limit orders |
#Examples
#Example 1: Tight Spread Market
A presidential election market:
- Bid: $0.64
- Ask: $0.65
- Spread: $0.01 (about 1.5%)
This tight spread allows efficient trading. A trader believing the true probability is 68% can buy at $0.65 with minimal friction.
#Example 2: Wide Spread Market
A niche market on a minor policy vote:
- Bid: $0.35
- Ask: $0.45
- Spread: $0.10 (about 25%)
The wide spread makes trading expensive. Even if you have a strong view, you're giving up significant edge just to execute.
#Example 3: Spread Compression
A new market launches with a 0.60 spread. As traders arrive and provide liquidity, the spread compresses:
- Day 1: 0.60 (50% spread)
- Week 1: 0.55 (20% spread)
- Month 1: 0.52 (8% spread)
The narrowing spread reflects increased market efficiency and liquidity.
#Example 4: Event-Driven Spread Widening
During major news events, spreads often widen temporarily:
- Normal spread: 0.60 (3%)
- During breaking news: 0.65 (17%)
- After settling: 0.63 (3%)
Market makers widen spreads during uncertainty to protect against being picked off by faster-informed traders.
#Risks, Pitfalls, and Misunderstandings
Ignoring spread in edge calculations
Many traders focus on whether the price seems wrong without accounting for spread costs. A position with 2% expected edge but 3% spread is net negative.
Assuming displayed spread applies to all sizes
The best bid and ask often have limited size. Trading larger quantities means walking through the order book and paying worse prices. Check depth, not just the displayed spread.
Spread fluctuation
Spreads aren't static. They widen during volatility and tighten during calm periods. The spread you see when analyzing may not exist when you trade.
Market order impact
Market orders guarantee execution but not price. In wide-spread markets, you may fill far from the midpoint.
Confusing spread with slippage
No. The spread is the gap between best bid and best ask, the cost of immediately crossing from one side to the other. Slippage is the additional cost when your order is too large to fill at the best price and must consume deeper levels of the order book. You always pay the spread; you pay slippage only when trading size relative to depth.
#Practical Tips for Traders
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Always calculate the effective spread before trading: Don't just look at prices; compute what it costs to enter and exit
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Use limit orders in wide-spread markets: Post an order inside the spread rather than paying the full ask. You may wait longer but save money
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Factor spreads into your edge threshold: If spreads are 2%, you need more than 2% conviction to justify trading
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Compare spreads across platforms: The same market may have different spreads on different platforms. Check before choosing where to trade
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Trade when spreads are tight: Spreads are often narrower during high-volume periods. Avoid trading during thin hours if possible
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Be the spread, don't pay the spread: By posting limit orders inside the spread, you can effectively become a market maker and earn rather than pay the spread
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Watch for spread manipulation: Unusually wide spreads may indicate manipulation or imminent news. Be cautious
#Related Terms
#FAQ
#Why do spreads exist?
Spreads compensate market makers for providing liquidity and taking risk. Market makers don't know if the person trading with them has superior information. The spread is their payment for accepting this "adverse selection" risk and keeping capital tied up in inventory.
#How can I get better prices than the spread?
Use limit orders. Instead of buying at the ask, post a bid slightly below the ask and wait. You might get filled at a better price by a seller willing to accept less. This is called "providing liquidity" rather than "taking liquidity."
#Do spreads affect AMM-based prediction markets?
Yes, but differently. AMMs don't have traditional bid-ask spreads from order books. Instead, slippage from the bonding curve functions similarly; larger trades get worse prices. Some AMMs also charge explicit fees that act like a spread.
#What causes spreads to widen?
Uncertainty (news events, pending announcements), low liquidity (few traders), and high volatility all widen spreads. Market makers protect themselves by demanding more compensation when risks are higher.
#Is it ever worth trading in wide-spread markets?
Sometimes. If you have very high conviction and a long time horizon, the spread cost may be acceptable. But wide spreads should make you question the trade; maybe there's a reason liquidity providers are demanding such high compensation.