Bid-Ask Spread

How exactly does a bid-ask spread form? Who determines how wide the gap is?

The order book always has two prices present simultaneously: the highest price a buyer is offering (the best bid) and the lowest price a seller is offering (the best ask). The distance between these two is the spread. This gap isn't set unilaterally by the exchange — it's the collective result of everyone posting orders in the market "calling out" a price. If someone is willing to quote a price closer to the other side, the spread naturally narrows; if nobody is willing to narrow it, the spread stays at its existing width.

A market maker's role in this is to actively narrow the spread while preserving enough margin for themselves — their bid price sits as close to their ask price as possible, but leaves a small cushion, and that cushion is their income source. A trading pair with better liquidity typically has more market makers competing to narrow the spread against each other, which is why it tends to have a tighter spread.

Is spread the same kind of cost as fees? Why do so many people notice fees but overlook the spread?

They're different costs, and frequently confused. Fees are explicitly listed on an exchange's fee schedule — a cost you can calculate precisely in advance. Spread doesn't appear on any fee schedule at all; it's hidden in the structural fact that the price you buy at is always slightly higher than the price you'd sell at. Even using only limit orders and never a market order, as long as you're trading against the market's existing best bid and ask, the spread cost is still there — it just isn't presented to you as a standalone percentage figure.

Most people only notice fees because fees are visible and easy to calculate; noticing spread requires actually comparing the distance between the best bid and best ask yourself, which most people never bother to do. This is also why thinly traded small-cap tokens often end up costing significantly more to trade than the headline fee number suggests — that invisible spread cost gets overlooked.

What makes a spread widen or narrow? Does high liquidity always mean a tight spread?

Liquidity is the primary determinant of spread — a trading pair with high volume, many participants, and intense competition among market makers typically sees its spread compressed very tight. An asset with low volume and little attention has fewer people willing to post orders, so the spread naturally runs wider, since anyone quoting needs a larger profit margin to compensate for the risk that their order might sit unfilled for a long time.

Beyond the long-term liquidity level, spread also shifts dynamically with market conditions: during sharp volatility or major news events, market makers will often actively widen their spread — or even temporarily pull their quotes entirely — to manage their own inventory risk. This means the same asset can have a very tight spread under normal, liquid conditions, but suddenly widen during a panic — precisely the moment traders most need low-cost entry and exit, yet end up paying a higher hidden cost instead.

How should the average trader actually factor spread into their decisions?

The most direct approach: glance at the distance between the best bid and best ask before placing an order, especially when trading a thinly liquid small-cap token or an obscure pair — spread can account for a large portion of the trading cost there, far exceeding the headline fee percentage, meaning the actual cost can stay high even when the listed fee looks low.

For short-term traders entering and exiting frequently, the impact of spread compounds with trade count, making it worth prioritizing pairs with good liquidity and consistently tight spreads. For occasional traders, a more practical reminder is to avoid rushing to place orders right when the market is moving sharply or news has just broken, since that's exactly when market makers are most likely to actively widen their spread — waiting until conditions settle a bit can save on this invisible hidden cost.