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Bid-Offer Spread

Bid-offer spread measures the difference between the buy and sell prices. The larger the difference between the prices the more the market will have to move to make a particular position profitable.

When the spread is zero, this is referred to as a “choice price“. This is the simplest metric to compare brokers (and LPs).

The bid/offer spread essentially represents liquidity.

Liquidity is the degree to which an asset can be quickly bought or sold on a marketplace at stable prices.

A narrower spread implies a deeper market where there is a sufficient volume of open orders so buyers and sellers can execute a trade without causing a big change in the price.

That’s in contrast to a weak or “thin” liquidity environment, where large orders tend to move the price, increasing the cost of executing trades, and deterring traders, in turn, causing a further decline in liquidity.

An important driver of liquidity is the rate of change in prices.

In times of extreme price volatility, spreads tend to widen and brokers’ ability to execute large orders is reduced.

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