Effective Spread
Market Microstructure glossary · Spread Economics & Liquidity Measurement
Definition
Twice the absolute difference between the trade price and the prevailing midpoint. Measures the actual cost of a trade.
Effective Spread in plain English
The effective spread measures what a trade ACTUALLY cost you, versus the "fair" price sitting exactly halfway between the best posted buy and sell quotes (the midpoint). If the midpoint is $50 and you end up buying at $50.02, you overpaid by 2 cents — and the measure doubles that gap to $0.04 so it reflects the full round-trip cost of getting in and later out. Why double it? Because a buyer pays a bit above the middle and a seller receives a bit below it, so doubling captures the total bite the market takes from a complete in-and-out trade. It's a reality-check number: the true cost of trading, not just the advertised spread.
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