In Which Market Condition Is the Difference between the Two Spreads Most Significant?

The difference between the quoted spread and the effective spread is most significant in highly liquid markets with high trading volume and intense market maker competition. In these environments, market makers are more likely to offer price improvement to attract order flow, executing trades inside the quoted spread.

Conversely, in illiquid or highly volatile markets, the two spreads tend to converge as market makers are less willing to offer price improvement.