Term · Liquidity & Trading
Effective Spread
In briefThe effective spread is the spread actually paid relative to the mid-price, measured against real execution rather than the merely quoted bid-ask price. For small caps the quoted spread is often only a minimum, while actual execution can be significantly more expensive.
Definition
The actual spread an investor pays relative to the mid-price, based on real execution rather than just the quoted bid and ask price.
How it is calculated
Formula. Effective spread ≈ 2 × |execution price − mid-price| ÷ mid-price.
Why it matters for small caps
For small caps, the quoted spread is often only a minimum indicator; actual execution can be significantly more expensive.
Common misreadings
- It is confused with the quoted spread; execution quality and partial fills can change the real spread.
In the process
Frequently asked
What is the effective spread?
It is the real distance to the mid-price actually paid on an execution. It reflects the actual trading costs better than the quoted spread.
How is the effective spread determined?
You relate the deviation of the execution price from the mid-price to that price and double it. This produces a measure of the real trading costs.
How does it differ from the quoted spread?
The quoted spread is only the displayed distance; the effective spread is the actual cost. Execution quality and partial fills can cause the two to diverge.
Related terms
Sources
Primary
EUR-Lex – MiFID II, Richtlinie 2014/65/EU
https://eur-lex.europa.eu/eli/dir/2014/65/oj
https://eur-lex.europa.eu/eli/dir/2014/65/oj
Methodology
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.