Bid-Ask Spread: FX Transaction Cost Explained
By Ken Chigbo, Founder, KenMacro. Published 2026-05-13.
Quick answer
The bid-ask spread is the difference between the bid price, at which a market maker buys from you, and the ask price, at which they sell to you. It represents the immediate transaction cost of opening a position and the compensation liquidity providers earn for quoting both sides of the market.
What is bid-ask spread?
The bid-ask spread is the gap between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask, sometimes called the offer). In forex, it is quoted in pips or fractional pips and applies to every instrument from major currency pairs to exotics, metals, and indices. The spread exists because market makers and electronic communication networks must be compensated for warehousing risk and providing two-sided liquidity. A tighter spread signals deeper liquidity and higher competition among quote providers, while a wider spread reflects thinner liquidity, higher volatility, or elevated inventory risk.
How traders use bid-ask spread
Retail traders pay the spread the moment they open a position, because the trade is marked at the bid if long and at the ask if short. The desk treats spread as a baseline cost that must be recovered before any profit accrues, which matters most for scalpers and high-frequency strategies where a fraction of a pip compounds across hundreds of tickets. Institutional desks negotiate spreads directly with prime brokers and route flow through aggregators to source the tightest quote available. Spreads compress during the London-New York overlap on majors like EUR/USD and GBP/USD, then widen at the Asian open, around major data releases, and into the daily rollover window. Traders also distinguish between fixed spreads, which stay constant but embed a premium, and variable raw spreads paired with a commission.
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Worked example of a bid-ask spread on EUR/USD
Suppose EUR/USD is quoted 1.08452 bid and 1.08456 ask. The spread is 0.4 pips. If a trader buys one standard lot (100,000 units), the position is filled at the ask of 1.08456 but immediately marked at the bid of 1.08452, producing an unrealised loss of roughly 4 USD on entry. The market must move 0.4 pips in the trader’s favour simply to reach breakeven before commissions or swaps. Multiply that across twenty round-turn trades in a session and the spread cost alone reaches 80 USD per lot, which illustrates why execution venue selection matters.
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Frequently asked
Why does the bid-ask spread widen around news releases?
Liquidity providers reduce their quoted size and widen spreads ahead of high-impact data like non-farm payrolls or CPI because they face elevated inventory risk. If a market maker is filled on one side just before a large directional move, they could be left holding a losing position. Widening the spread compensates for that risk and discourages aggressive flow. Spreads typically normalise within minutes once the release is absorbed and two-way trading resumes.
Is a zero-spread account actually free to trade?
No. Zero-spread or raw-spread accounts replace the marked-up spread with an explicit commission per lot traded, usually charged on both the open and close. The total cost is often comparable to, or slightly lower than, a standard variable-spread account, but the structure is more transparent. The desk prefers raw-spread plus commission for strategies sensitive to execution cost, because it isolates the broker mark-up from genuine interbank liquidity.
What is a typical spread on EUR/USD?
On a competitive retail raw-spread account, EUR/USD frequently quotes well under one pip during the London and New York sessions, when liquidity is deepest. Standard variable-spread accounts tend to show wider quotes that include the broker’s mark-up. Spreads on exotic pairs, minor crosses, and instruments outside their home sessions can be several multiples wider, reflecting thinner order books and higher quoting risk.
Does the bid-ask spread affect stop-loss and take-profit orders?
Yes. A long position is closed at the bid and a short position is closed at the ask, so the spread is paid again on exit. Stop-loss orders on long positions trigger when the bid reaches the stop level, while stops on short positions trigger when the ask reaches it. Traders who place stops too close to entry can be filled simply by a transient spread widening, particularly around session opens or data releases.
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