Effective Spread (Microstructure)
Computes the effective spread of a trade: twice the distance between the price at which the trade actually executed and the midpoint between the best bid and best ask at that moment. Unlike the quoted spread, which measures the bid-ask difference, the effective spread captures the real cost the investor paid, accounting for where the order actually filled in the book. The result comes in absolute value and as a percentage of the midpoint. Enter the trade price and the midpoint.
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Effective Spread (Microstructure)
Computes the effective spread of a trade: twice the distance between the price at which the trade actually executed and the midpoint between the best bid and best ask at that moment. Unlike the quoted spread, which measures the bid-ask difference, the effective spread captures the real cost the investor paid, accounting for where the order actually filled in the book. The result comes in absolute value and as a percentage of the midpoint. Enter the trade price and the midpoint.
The real cost of trading, not the quoted one
The quoted spread, the gap between the best bid and the best ask, is what everyone sees on screen. But it's rarely what you actually pay. Large orders walk the book, market orders fill at different points, and the real cost can be higher or lower than quoted. The effective spread measures that true cost, comparing the price the trade filled at with the market midpoint at that instant.
The formula doubles the distance between the execution price and the middle of the book, because the spread is a round-trip cost. Microstructure researchers use this metric to assess the execution quality of brokers and algorithms: an effective spread smaller than the quoted one means the order got price improvement; larger, that it suffered impact.
Enter the price the trade filled at and the midpoint between bid and ask at the moment. The tool returns the effective spread in absolute value and as a percentage of the midpoint, which is how you compare across assets with different prices. It's a snapshot of one execution; to evaluate a strategy, you average over many trades.
Related Tools
Bid-Ask Spread
Computes the bid-ask spread of an asset: the difference between the ask (sell) price and the bid (buy) price, the midpoint between them and the spread as a percentage of that midpoint. The spread is the invisible cost of trading and a direct measure of liquidity: liquid instruments have a tight spread, illiquid ones a wide spread. As a percentage, it lets you compare the cost across assets of different prices. Enter the bid and ask prices.
Roll Spread Estimator
Computes Roll's effective spread estimator from a price series: 2 times the square root of the negative serial covariance between consecutive price changes. The intuition, from Richard Roll in 1984, is that the back-and-forth between buying and selling (the bid-ask bounce) creates a negative correlation in very short-term returns, and the size of that correlation reveals the implied spread. When the covariance isn't negative, the estimator is undefined and returns zero. Enter the price series.
Implementation Shortfall
Computes the implementation shortfall of a buy order, André Perold's concept that measures the gap between the return of a paper portfolio executed instantly at the decision price and that of the actually executed portfolio with all costs. It separates the execution cost (price impact and commissions) from the opportunity cost of the shares that went unfilled. The result comes in money, percentage and basis points, always as a cost (positive is worse). Enter the decision price, the execution price, the quantities, the commissions and the final price.
The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.