Bid and ask

§ 01Two queues

Every market in an exchange-traded instrument runs two lists simultaneously. On one side sit buyers, each stating the highest price they are willing to pay — their bid. On the other sit sellers, each stating the lowest price they will accept — their ask, sometimes called the offer. The market's job is to hold these lists in order and watch for the moment a bid meets or exceeds an ask, at which point a trade executes.

The best bid is simply the highest number on the buyers' list. The best ask is the lowest number on the sellers' list. Together they are called the inside market or top of book, because they represent what is available right now without looking any further down either queue. Everything else — the bids below the best bid, the asks above the best ask — constitutes the depth behind those front prices, waiting its turn.

§ 02The spread

The gap between the best bid and the best ask is the spread. If the best bid is 99 and the best ask is 101, the spread is 2. This is not a fee charged by an exchange, a regulator, or any single institution. It emerges from the two queues themselves: buyers and sellers have not yet agreed, and the distance between their positions is exactly the spread.

The spread functions as the cost of immediacy. A trader who wants to buy right now cannot wait for a seller to come down to their price — they must lift the best ask, paying 101 rather than 99. A trader who wants to sell right now must hit the best bid, accepting 99 rather than 101. The moment either of them acts, they give up the spread. The trader who posts a limit order and waits might eventually get a better price, but time and uncertainty are the payment for that patience.

Everything else — the bids below the best bid, the asks above the best ask — constitutes the depth behind those front prices, waiting its turn.

Because the spread is the price of acting without delay, it varies with the ease of matching. In a liquid instrument — one with many participants and continuous two-sided interest — bids and asks cluster tightly and the spread narrows, sometimes to a single minimum tick, the smallest permitted price increment. In a thinly traded instrument, where one side of the book may be sparse or entirely absent, the spread widens to reflect the difficulty of finding a counterparty. Spreads also widen during moments of stress: when participants are uncertain, they pull their orders or post them at more extreme prices, and the gap between the two queues grows.

§ 03Makers and takers

Market participants relate to the spread in two distinct ways. Those who post limit orders — bids below the ask or asks above the bid — are adding to the queue. They are making liquidity: providing the resting orders against which others can trade immediately. Those who send market orders, or limit orders aggressive enough to match against resting quotes, are taking liquidity: they consume what the makers posted. The maker-taker distinction matters to exchange economics because many venues rebate makers and charge takers, reversing what might seem the natural direction of payment.

The two queues are therefore not symmetrical in motivation. Makers are willing to wait; they post prices and accept the risk that the market moves against them before their order fills — a risk known as adverse selection, the possibility that the person trading against you knows something you do not. Takers are paying the spread to avoid that wait, which is why the spread, viewed from the maker's side, is partial compensation for the risk of being picked off by a better-informed counterparty.

None of this requires human negotiation. The matching rules that govern modern electronic order books apply price priority and then time priority mechanically: the best price trades first, and among equal prices, the earlier order trades first. The spread is simply what remains when those rules have done their work and the two queues have not yet found their midpoint.