Why the spread you pay beats the spread you see

Question

A stock is quoted 49.95 bid / 50.05 ask, a 10-cent quoted spread. Yet when you check your executions, your buy orders are averaging a fill price of 50.02, not 50.05. Why are you filling better than the quoted ask? What is the effective spread you actually pay?

Accepted Answer

Quoted spread. What the screen advertises: 	ext{quoted spread} = 50.05 - 49.95 = 0.10 = 10 	ext{ cents.} The mid is (49.95 + 50.05)/2 = 50.00. Effective spread. What you actually pay, measured as twice the distance from mid to your fill: 	ext{effective spread} = 2 	imes {	ext{fill} - 	ext{mid}} = 2 	imes 50.02 - 50.00 = 2 	imes 0.02 = 0.04 = 4 	ext{ cents.} So you're really paying 4 cents round-trip-equivalent, not the 10 the screen shows. The effective spread is less than half the quoted spread here. Why fills beat the quote. Several mechanisms improve on the displayed ask: - Hidden…

Why the spread you pay beats the spread you see

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