Why Is the Effective Spread Considered a More Accurate Measure of Trading Cost than the Quoted Spread?
The quoted spread only reflects the best available prices at a single point in time, assuming a small trade. The effective spread captures the actual cost of execution, factoring in the price at which the order was actually filled.
If an order causes price impact or slippage, the effective spread will be wider than the quoted spread, providing a more realistic assessment of the total transaction cost.
Glossar
Quoted Spread
Spread ⎊ In cryptocurrency derivatives, particularly options, the quoted spread represents the difference between the bid and ask prices for a contract.
Spread
Arbitrage ⎊ A spread, within cryptocurrency and derivatives markets, frequently manifests as a temporary pricing discrepancy across exchanges or related instruments, presenting a risk-free profit opportunity for sophisticated traders.
Effective Spread
Calculation ⎊ The Effective Spread measures the true cost incurred when executing a trade by comparing the realized execution price against the midpoint of the bid and offer prices prevailing just before the order interaction.