Spread in trading: how it affects your real costs

Introduction: Hidden Costs of Asset Trading

When trading cryptocurrency, visible fees are just part of the costs. The real cost of a transaction is determined by several factors, among which the spread in trading and the phenomenon of slippage play a key role. These two concepts directly affect the profitability of trading operations, especially when dealing with large volumes or in volatile markets.

The market price is formed under the influence of supply and demand. However, the trading volume, the current liquidity of the asset, and the types of orders you use can significantly differentiate the final execution price from what you expected. Understanding these mechanisms is a critically important skill for any trader.

How the Spread Between Bids and Asks is Formed

The spread in trading represents the difference between the highest price a buyer is willing to pay (bid price) and the lowest price at which the owner of the asset is willing to sell (ask price).

In centralized markets, this difference is often created by professional market makers or liquidity providers. In the cryptocurrency ecosystem, the spread arises naturally due to the difference between the limit orders of buyers and sellers in the order book.

If you want to make an instant purchase, you will have to accept the most favorable offer for the seller (the lowest ask price). When selling urgently, you must agree to the maximum bid price offered by the buyer. Assets with high liquidity (such as major pairs on the forex) demonstrate a narrow spread, allowing traders to close positions without sharp price jumps. This is due to the large volume of orders in the book.

When the spread widens, large orders can cause significant price fluctuations of the asset.

The Role of Market Makers in Creating the Spread

The concept of liquidity is critical for all financial markets. In markets with insufficient liquidity, a trader may wait for hours or even days for their order to be fulfilled by another participant. This creates a problem: liquidity must come from somewhere.

In traditional financial markets, the role of liquidity providers is taken on by brokers and specialized market makers, who receive compensation in the form of arbitrage profits. A market maker can use the spread as a source of income: by simultaneously buying an asset at a low price and selling it at a high price, they achieve stable profit.

Imagine a situation: a market maker simultaneously acquires BNB for $800 per unit and places a sell offer for the same BNB at $801. The resulting spread of $1 is pure profit. Any trader who wants to make an instant transaction must accept these terms. Even a minimal spread can generate significant income when trading large volumes throughout the day.

Competition among market makers leads to a narrowing of the spread for popular assets. The higher the demand for an asset, the smaller the spread in trading.

How to Calculate the Spread Percentage

A percentage calculation is used to compare the spreads of different cryptocurrencies:

(Ask price − Bid price) / Ask price × 100 = Spread percentage

Practical example: if the ask price is $9.44 and the bid price is $9.43, the difference is $0.01. Dividing $0.01 by $9.44 and multiplying by 100 gives a spread percentage of about 0.106%.

Now let's compare it to a more liquid asset. With a bitcoin spread of $1 , which seems larger in absolute terms, the percentage spread is only 0.000844%. This demonstrates a key conclusion: assets with low percentage spreads are much more liquid and safer for large orders.

Assets with lower trading volumes typically have a wider spread in trading — this reflects a lack of liquidity and competition among market makers.

What Happens During Price Slippage

Slippage is the phenomenon when a trade is executed at a price significantly different from what the trader expected. This is especially common in volatile markets or during periods of low liquidity.

Scenario: you place a large market order to buy expecting a price of $100. However, there are not enough orders in the book to fully fill at that price. The system automatically starts taking the next available orders at higher prices until your entire order is executed. As a result, the average price of your purchase exceeds (—that is slippage.

When you create a market order, the exchange scans the available offers in the order book. On the surface, the system offers you the best price, but when there is insufficient volume at that level, you begin to move up the order chain. The result is execution at an unforeseen price.

On decentralized exchanges and automated market makers, slippage can reach 10% or more from the expected price, especially when trading low liquidity altcoins.

Two sides of slippage

Slippage is usually associated with losses, but an alternative scenario is also possible. Positive slippage occurs when prices move in your favor: prices drop when placing a buy order or rise when selling. This is a rare occurrence in markets with stable dynamics, but it happens in volatile markets.

To protect against slippage, some platforms allow users to manually set an acceptable slippage level )slippage$100 . The system will refuse to execute an order if the price deviates beyond the set X%. This prevents unexpected losses, but it may slow down execution or lead to order non-fulfillment in high volatility conditions.

If you set a tolerance that is too high, more agile traders or bots may get ahead of you by setting a higher fee and making the trade first (this is called front-running).

Practical ways to reduce negative slippage

( Split large orders into parts

Instead of placing one large order, split it into several smaller ones. Carefully study the order book and try not to exceed the available volume at each price level.

) Consider network fees

When working with decentralized platforms, gas fees can be significant. During periods of high blockchain activity, fees increase, which can completely offset the anticipated profit. Choose the timing for trading based on network activity.

Choose markets with sufficient liquidity

Trading assets with low volume significantly impacts the price—your trades can greatly shift the market. Whenever possible, focus on assets with high liquidity and a large trading pool.

Use limit orders instead of market orders ###

A limit order is executed only at the specified price or better. You may wait longer, but you get a guarantee against unexpected slippage. This is a reliable protection for serious traders.

Conclusion

The spread in trading and slippage are not abstract concepts, but real factors that affect the final cost of your trades. Their impact is negligible at low volumes, but when trading large amounts, the average price per unit can differ significantly from what was expected.

This is especially critical when working with decentralized finance, where incorrect risk assessment can lead to significant losses. Front-running and excessive slippage are real threats for the unprepared trader. Armed with knowledge about the spread mechanism and methods to minimize slippage, you will be able to make more informed trading decisions.