Spread cost is a certain charge every time you cross the book. Even when direction is right, it can erase net advantage.
Who this is for
- Anyone who trades often with modest profit targets.
- Anyone who wants to estimate strategy break-even correctly.
- Anyone comparing venues with different microstructures.
Prerequisites — Complete silver-path first (min.: market-order, slippage, active-management, position-sizing). Foundation: bronze-path.
In plain terms — Buying at the ask and selling at the bid has an immediate price. Repeated often, that cost weighs more than it seems.
Professional approach
Measure average, median, and stress-regime spread per instrument. Distinguish quoted spread from truly tradable spread. Optimise time, venue, and order type to reduce unnecessary crossings. Include realistic spread in backtests and live simulations. Update estimates when market liquidity changes.
Example — System with 300 monthly trades and average spread of 3 bps per side. Round-trip cost reaches 18 bps with slippage included. Without this estimate the strategy looks profitable only on paper.
Card
- Goal: quantify and reduce bid-ask cost.
- Key inputs: tick data, effective spread, trade frequency.
- Warning sign: live performance below expectation on identical setups.
- Typical mistake: using a fixed, overly optimistic spread.
- Practical action: stress spread in robustness tests.
Gold path — Module: Professional execution. Part of gold-path.
Links
Module: Module 1 — What is a market
Understand that the market is not a line going up and down, but a place where exchange happens.
