What the Spread Actually Costs You
The gap between bid and offer is the largest cost on most event-market trades, and the only one that never appears on a statement. How to price it.
Every market has two prices: the highest anyone will pay, and the lowest anyone will accept. The distance between them is the spread, and on event markets it is usually the single largest cost of trading.
The arithmetic
A market quoted 58/62. You buy at 62. Nothing happens. You sell at 58. You have lost four cents on a position that cost sixty-two — about six and a half per cent, for nothing.
The mid is 60, so people describe this as "paying two cents of spread" on each side. Both framings are the same number. What matters is that a round trip costs the full spread, not half of it.
Why event markets have wide spreads
One-cent ticks are coarse at low prices. The minimum spread on a market at 4 cents is 25% of the price. This is structural and no amount of liquidity fixes it. Prices near 1c and 99c.
Thin participation. Most markets have few active participants. Fewer quotes means a wider gap between the best of each side.
Inventory risk for makers. Someone quoting both sides holds a position they did not choose. On a binary contract that position is a bet with a known payoff and no way to hedge it except in the same market. The spread is their compensation for that. What market makers do.
Settlement horizon. A maker on a contract resolving in eight months has capital committed for eight months. The wider spread is partly a capital charge. Capital lockup.
What this does to a strategy
It doubles on a round trip. Exit before settlement and you pay twice.
It scales inversely with edge. A strategy with a two-cent edge trading a four-cent spread is a losing strategy. This kills more ideas than any other single factor.
It is worse than the fee, usually. People check the fee schedule carefully and ignore the spread, which is generally several times larger.
How to reduce it
Rest orders instead of crossing. Offer inside the spread and wait. You save the crossing cost when filled, and you miss trades when the market moves away. Limit orders versus market orders.
Trade liquid markets. The spread on the busy markets is a fraction of the spread on the quiet ones, and the difference is much larger than anything you can achieve by cleverness.
Hold to settlement. Settling at zero or a dollar pays no spread on exit. For a position you were going to hold anyway, this is a genuine saving. Early exit versus holding.
Check both sides. Buying No at 40 and selling Yes at 60 are the same position, and the two books are not always equally good. Yes and No shares.
Spreads and cross-venue comparison
This is where ignoring the spread does the most damage.
Comparing mid to mid across two venues produces a gap that nobody can transact. The reachable gap is: buy at the offer on the cheap side, sell at the bid on the expensive side. On two markets each quoted four cents wide, that is four cents less than the mid-to-mid figure.
A six-cent mid-to-mid gap can be a two-cent reachable gap before any fee. This is the first subtraction in what a gap is actually worth, and it is why this site reports a theoretical cross-market edge rather than a return.
Next
Depth and slippage — what happens when your order is bigger than the quote.
Educational content only. Nothing here is financial advice, a solicitation, or an offer to trade. Prediction markets can move against you and a position can lose its entire value. Where this guide describes a difference between venues it describes a theoretical cross-market edge in observed prices, which is not a profit: fees, spreads, capital lockup, transfer time and differing settlement rules all come out of it first.
Keep reading
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Order Books and Liquidity · 3 min readWhat Market Makers Do on an Event ExchangeSomebody is quoting both sides and carrying the risk of doing so. Understanding their problem explains most of what the order book looks like.
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