Bid-ask spread explained: why it has a floor, and what that floor costs you

The bid-ask spread is usually explained in one sentence and then dropped: it is the gap between what buyers offer and what sellers ask, and you pay it when you trade. True, and not useful. The part that decides whether it matters to you is never mentioned: the spread has a floor. It cannot get tighter than one cent, and on a large fraction of quotes it is already there. Once you know that, a lot of things that look like bad luck turn out to be arithmetic. We recorded 264 US trading sessions — 35,207,932 quotes — and measured it.

1. It is a fee, not a price

There is no single price for a stock at any instant. There are two: The bid is the highest price someone is currently willing to pay. It is what you get when you sell right now. The ask is the lowest price someone is currently willing to accept. It is what you pay when you buy right now. The gap between them is the spread. You buy at the worse of the two and sell at the worse of the two, so a round trip costs you the full spread, not half of it. That is the number to carry around: enter and exit at market, and one whole spread is gone before the stock has done anything. This is why the quoted "price" on a chart is misleading. A chart usually draws the last trade or the midpoint, and neither is available to you. The prices you can actually transact at sit on either side of it.

2. The floor nobody mentions

US stock prices at $1 and above move in one-cent increments. That is the minimum tick, and it means the spread cannot be narrower than one cent. There is no such thing as a half-cent spread on a regular US equity quote in that price range. Below $1 the rule is different and so is the behaviour. Those stocks quote in increments of $0.0001, and we measured what that does: the finer grid does not produce a tighter market, and the floor described here stops binding almost entirely. An earlier version of this guide stated the one-cent floor without the price qualifier, which was wrong for sub-dollar names. The measurement is here: https://traderwe.com/research/penny-stock-spreads-a-finer-price-grid-does-not-mean-a-tighter-market That sounds like a technicality until you measure how often it binds. Across our recording: 32.2% of all quotes were already exactly one cent wide. Roughly a third of the time, the market is as tight as the rules physically allow. It is not going to improve, no matter how liquid the stock gets, how long you wait, or what time of day it is. You are at the floor. For those quotes the spread is not a market condition you can shop around. It is a fixed toll, and its size in percentage terms is decided entirely by one thing: the price of the stock.

3. The same penny is a different tax on every stock

Here is the whole point of this guide in one table. A one-cent spread, expressed as what it costs you on a round trip: Same penny. Thirty-three times the cost on the cheap stock. This single table explains a lot of frustration that gets blamed on skill: Scalping cheap stocks is arithmetically hard. If you are targeting a 0.5% move on a $1.50 stock, the minimum possible spread already eats more than the entire target. There is no entry timing, no indicator setting and no amount of discipline that fixes it. The trade is negative before you place it. The same strategy behaves completely differently across price bands. A method that works on $50 names and fails on $2 names has not necessarily stopped working. It may simply have crossed a cost threshold, which is why testing a strategy without price band filters produces confusing results. "High volume" does not mean "cheap to trade". A $1 stock can trade enormous share volume and still cost you 1% per round trip, because share volume does not change the tick size.

4. When the spread is widest

Spreads are not constant through the day. Median spread, in basis points, by time and price band: The opening half hour is the most expensive window of the day, in every band. In $20-200 names it is 60bp against 33bp in the afternoon — nearly double. Notice also how flat the $1-5 column is: 79bp at the open, 68-70bp for the rest of the day. The cheap band barely improves, because it is pinned near the tick floor from section 2. The expensive bands have room to tighten as the day settles; the cheap band does not. You can read the full measurement, including how order size changes the picture, in what a US stock actually costs to trade.

5. What you can actually control

You cannot negotiate the spread. You can decide how much of it you pay. Use limit orders, especially on cheap stocks. A market order crosses the spread by definition. A limit order at or inside the touch pays less, at the cost of possibly not filling. On a $1.50 stock where crossing costs 0.67% before anything else, that trade-off is usually worth making. Avoid the open unless the setup requires it. From the table above, the first thirty minutes is the worst pricing of the session. If your method works equally well at 10:30, it just got cheaper. Choose your price band deliberately. This is the highest-leverage decision on this whole page, and most traders make it by accident. Moving from $2 names to $20 names changes your cost floor by an order of magnitude. Size targets against the toll, not against a chart pattern. If the round-trip cost is 0.67%, a 1% target is mostly cost. A 3% target is mostly trade.

6. What the spread does not tell you

A tight spread is not the same as a liquid market, and this catches people out. The spread tells you the price at the very top of the book. It says nothing about how much you can trade at that price. A stock can show a one-cent spread with only a few hundred dollars resting behind it, and the moment your order is larger than that, you are paying worse prices regardless of how tight the quote looked. That second dimension is depth, and we measured it separately in what Level 2 market data actually shows. The short version: the quoted price is typically good for around $1,155 to $5,150 depending on the band, which for many traders is smaller than a normal position. Spread tells you the price of trading. Depth tells you how much of it you can do. You need both, and a definition of the spread alone will never tell you either — which is why the glossary entry is a starting point rather than an answer.