Market Spread: A Comprehensive Guide to the Difference Between Buying and Selling
What is a Market Spread and Why Does it Exist
Imagine you visit a currency exchange and see the dollar rate: buying — 92.50, selling — 93.50. This difference of one ruble is the spread, only applicable to the currency market. Market spread operates on the same principle — it is the difference between the best buying price (bid) and the best selling price (ask) of a financial instrument in the market order book.
Unlike brokerage or exchange commissions, which are charged separately, the spread is built into the pricing mechanism itself. It arises naturally when buyers want to purchase an asset at a lower cost, and sellers aim to sell at a higher price. This "no man's land" between the desires of both parties creates the spread.
To grasp the scale of this phenomenon, it is worth providing specific figures. For the shares of PAO Gazprom — one of the most liquid instruments in the Russian market — the spread typically amounts to 2-5 kopecks with a price of around 232 rubles, which equals 0.01-0.02%. For less popular assets, such as shares of regional banks, the spread can reach several percent of the paper’s value.
The spread serves as a kind of "indicator" of market conditions. A narrow spread signals high participant activity and readiness to trade near market prices. Conversely, a wide spread indicates uncertainty, low activity, or heightened risks.
How the Spread is Formed and Calculated
The Mechanism of Spread Formation in the Market Order Book
To understand the nature of the spread, one must delve into the "kitchen" of exchange trading. In the market order book, hundreds and thousands of orders from different participants coexist simultaneously. Buyers place limit orders to purchase at a price lower than the current one — they hope to buy the asset at a discount. Sellers place their sell orders above the market price — they expect to obtain a premium.
A sort of "no man's zone" is created between these two groups of orders — a price range at which no one is ready to trade at that moment. This zone represents the spread. When a market participant is ready to immediately buy or sell an asset, they "consume" the best orders from the order book, temporarily changing the size of the spread.
Formulas and Examples for Spread Calculation
Absolute spread is calculated as:
Spread = Ask Price - Bid Price
For instance, if the best selling price is 150.20 rubles, and the best purchasing price is 150.15 rubles, then the absolute spread equals 5 kopecks.
Relative spread indicates the size of the spread as a percentage of the asset's price:
Spread (%) = ((Ask - Bid) / ((Ask + Bid) / 2)) × 100
In our example, the relative spread would be: ((150.20 – 150.15) / ((150.20 + 150.15) / 2)) × 100 = 0.033%.
Spread in basis points is often used for bonds and serves as a more precise measure: 1 basis point = 0.01% = 0.0001. In professional circles, traders prefer relative and basis measurements, as they allow for the comparison of the liquidity of assets with different prices.
Classification of Types of Market Spreads
By Method of Establishment: Fixed and Floating
Fixed spread resembles the operation of a currency exchange — its size does not change regardless of market conditions. This approach is commonly seen among forex brokers, who guarantee a constant price difference between buying and selling. The advantage is the predictability of transaction costs. The disadvantage is that during calm periods, the trader overpays, while in volatile times, they may miss out on actual market liquidity.
Floating spread reflects the real state of the market in real-time. During quiet morning hours, it may amount to mere kopecks, while during significant news releases, it can widen to rubles. This type of spread dominates organized exchanges, as it more accurately reflects the balance of supply and demand.
Specialized Types of Spreads
Calendar spread — the price difference between futures contracts for the same underlying asset with different expiration dates. Actively used in the derivatives market for trading the RTS index, currency pairs, and commodity futures.
Intermarket spread arises between the prices of the same asset on different trading venues. A classic example is the dollar rate on the Moscow Exchange and in the interbank market, creating arbitrage opportunities.
Intramarket spread forms between the prices of related assets on the same exchange, such as between common and preferred shares of the same issuer.
Factors Influencing Spread Size
Asset Liquidity as the Main Factor
Liquidity and spread are inversely related: the more participants are willing to trade at prices close to market prices, the narrower the spread becomes. This is explained by simple logic: when many buyers and sellers compete, they are forced to offer more attractive prices.
For Russian "blue chips" — Sberbank, Gazprom, Norilsk Nickel — the spread comprises hundredths of a percent. Second-tier stocks have spreads of 0.05-0.1%, while illiquid stocks may have spreads of several percent.
Impact of Volatility
High volatility leads to expanded spreads, as market participants demand compensation for the risk of sharp price movements. During periods of significant reports or Central Bank of Russia decisions, spreads can multiply.
Trading Cycle Timing
With the morning market opening, spreads gradually narrow, reaching their minimum during peak activity hours (from 12:00 to 16:00). In the evening and nighttime, when activity decreases, spreads widen, creating both risks and opportunities for experienced traders.
The Role of Market Makers in Spread Formation
Functions and Obligations of Market Makers
Market makers are professional participants that maintain spread and liquidity. Under agreements with the exchange, they place both-sided orders within the agreed-upon spread size and order volume.
In 2025, on the Moscow Exchange, market makers operate in new programs for corporate bonds and OFZs, ensuring liquidity during evening sessions.
Regulation and Requirements
New rules require that at least 75% of the market maker's order volume be passive, reducing manipulation risks and increasing market transparency.
Practical Use of Spreads in Trading
Assessing Liquidity Before Entry
Before executing a trade, it is vital to assess the spread, as it impacts final profitability. A narrow spread reduces transaction costs and improves entry and exit conditions from a position.
Optimizing Order Execution
Limit orders within the spread allow for purchasing an asset at a lower price or selling it at a higher price than utilizing market orders. This technique proves particularly effective when trading large volumes.
Arbitrage Strategies
Intermarket and calendar arbitrage leverage price differences across different venues or contracts. In cryptocurrency, spread arbitrage between exchanges can yield up to 1-3% profit per trade, factoring in commissions and asset transfer time.
Spread Trading and Risk Management
Core Principles of Spread Trading
Spread trading is based on trading the price difference between related assets, which decreases volatility and enhances strategy predictability compared to directional trading.
Types of Strategies
Pair trading combines the purchase of one asset and the sale of a related one. Calendar strategies utilize price differences in futures with different expiration dates.
Risk Management
Stop-loss and take-profit orders based on relative values help to limit losses and secure profits. The "2% per trade" rule also applies to spread trading as excessive position size can nullify statistical advantages.
Technological Innovations and Automation
Algorithmic Trading and HFT
Modern algorithms and high-frequency strategies analyze terabytes of data and execute trades with minimal delay. During calm periods, HFT robots narrow the spread; however, during stress moments, they can sharply widen it or disconnect.
Artificial Intelligence and Forecasting
Neural networks and machine learning models predict spread changes based on prices, volumes, news, and social signals, allowing for more efficient trading.
Decentralized Exchanges and AMMs
Automated Market Makers on DEX use formulas to determine prices, creating new spread behaviors distinct from traditional order books.
Macroeconomic and Geopolitical Factors
Monetary Policy
The Central Bank of Russia's decisions regarding the key rate influence the cost of banking funding and spreads in interbank and corporate markets. A reduction in the rate to 13-14% in 2025 has already led to a narrowing of bond spreads.
Geopolitical Risks
Sanctions and external pressures widen spreads due to the premium for uncertainty. In 2025, new restrictions led to increased volatility and higher spreads in the Russian market.
Regulatory Framework and Development Prospects
Actions by the Bank of Russia
The Central Bank has identified deficiencies in market makers' operations and implemented new transparency and fair access requirements for all participants to liquidity. This fosters further narrowing of spreads and enhances market quality.
Development of Exchange Infrastructure
Changes in price step on the Moscow Exchange, introduced in August 2025, are aimed at optimizing market microstructure and reducing transaction costs for participants.
Conclusion
Market spread is a complex indicator reflecting market efficiency, competition levels, and the quality of financial infrastructure. For Russian investors, understanding spread mechanisms allows for more informed decisions, optimized costs, and identification of new profit opportunities.
In the future, the advancement of algorithmic trading, machine learning, and blockchain technologies will continue to transform spread formation, making markets more efficient and transparent. The Russian market has every chance to align more closely with international standards, providing participants with world-class tools to achieve financial goals.
