How to Calculate the Bid-Ask Spread: Trading Costs Beyond Commissions
The gap between the best ask and bid is a cost of immediate trading. Calculate the spread in KRW and percentage terms, and distinguish additional costs caused by order size.
The bid-ask spread is the best ask minus the best bid. Even with low commissions, a wide spread can cause a loss if you buy and immediately sell, so include it in your trading-cost assessment.
Calculate both the amount and the percentage
Comparing two stocks at different price levels using only their spread in KRW can be misleading. For comparison, calculate the midpoint of the best ask and bid, then divide the spread by that midpoint to express it as a percentage. Some services use the bid or last execution price as the denominator, so their displayed percentage may differ slightly from your calculation. Observation times should also match. Do not compare a wide morning spread with a narrow afternoon spread and conclude that the difference is a fixed characteristic of the stocks.
Distinguish round-trip cost from one-way cost
In a simplified situation with unchanged prices and quotes, buying at the ask and selling at the bid loses the spread per share. Relative to the midpoint, you can think of half the disadvantage falling on each side. In actual markets, however, prices move between trades and your order may exhaust available depth, so costs do not divide exactly in half. Commissions and taxes are additional, meaning the spread alone cannot determine your final return.
A narrow spread can still leave a large order expensive
If only a small quantity is available at the best quotes, the displayed spread may be narrow while a large order receives a worse average price. This additional difference relates to the market impact of consuming several price levels. Splitting an order may reduce immediate impact, but leaves you exposed to market movements while waiting. The SEC's explanation that extended-hours trading can have fewer participants and less price competition fits the same context. Decide the session and quantity first, then examine quotes for those conditions. When comparing costs across stocks, first work out expected quantities for the same investment amount. This reduces the effect of differing share prices on comparisons of spreads in KRW. For large orders, record the cost based on the best quotes separately from the estimated average cost across multiple levels. A large difference signals that a narrow displayed spread does not necessarily mean sufficient liquidity.
Worked example
Hypothetical example: If the bid is KRW 9,990 and the ask is KRW 10,010, the midpoint is KRW 10,000 and the spread is KRW 20, or 0.2%. Buying 100 shares at KRW 10,010 and promptly selling at KRW 9,990 produces a KRW 2,000 loss before other trading costs. This assumes sufficient quantity at both quotes and unchanged prices, so it is not an upper bound on actual costs.
What to check
- Have you used a consistent denominator for percentage calculations?
- Is there enough quantity at the best quotes for your order?
- Have you calculated the spread and commissions separately?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.