How Is ‘Bid-Ask Spread’ Related to Market Depth and Liquidity?

The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). High market depth and liquidity typically result in a narrow, or small, bid-ask spread because there are many orders close to the current price.

A wide spread, conversely, indicates low liquidity and shallow market depth, meaning a trade will have a larger price impact.