What Is the Effective Spread and How Does It Differ from the Quoted Spread in a Thin Market?

The quoted spread is the difference between the best bid and best ask prices currently visible in the order book. The effective spread, however, is the difference between the actual execution price of a market order and the mid-price at the time of the order.

In a thin market, a large market order will consume multiple price levels, making the effective spread significantly wider than the quoted spread due to high slippage. The effective spread is a better measure of the true transaction cost.