Which statement best describes a dealer's spread?

Which statement best describes a dealer's spread?

• A. It is the difference between bid and ask prices and signals liquidity.
• B. It is the company's annual revenue from trading.
• C. It is the difference between the highest and lowest price of the day.
• D. It is the commission charged by brokers to execute a trade.

Answer: (A)

The spread represents how much you must pay to trade immediately in a dealer market, and it reflects liquidity and the cost of getting a trade done right away. A dealer quotes two prices: a bid, the price they’ll pay to buy, and an ask, the price they’ll charge to sell. The difference between those two prices is the spread. A smaller spread means high liquidity and lower trading costs for a quick, or marketable, trade, while a larger spread signals lower liquidity or higher risk for the dealer. When you buy, you pay the ask price; when you sell, you receive the bid price, so the spread is the built-in cost you must overcome for a round-trip trade, separate from any other fees. The other statements describe different concepts: revenue from trading, the intraday price range, or broker commissions, none of which define the dealer’s spread.

The spread represents how much you must pay to trade immediately in a dealer market, and it reflects liquidity and the cost of getting a trade done right away. A dealer quotes two prices: a bid, the price they’ll pay to buy, and an ask, the price they’ll charge to sell. The difference between those two prices is the spread. A smaller spread means high liquidity and lower trading costs for a quick, or marketable, trade, while a larger spread signals lower liquidity or higher risk for the dealer. When you buy, you pay the ask price; when you sell, you receive the bid price, so the spread is the built-in cost you must overcome for a round-trip trade, separate from any other fees. The other statements describe different concepts: revenue from trading, the intraday price range, or broker commissions, none of which define the dealer’s spread.