Effective Spread
Effective spread measures the execution cost relative to a reference price, often the mid price.
Definition
Effective spread is a microstructure metric that estimates execution cost relative to a reference like mid price. It captures the real cost of trading caused by spreads and execution frictions.
Why it matters
In prediction markets, the price range is bounded, so spread costs can dominate small edges. Effective spread helps you understand whether you are consistently paying more than the reference price.
How it connects
• Effective spread relates to bid ask spread but focuses on actual fills.
• It is distinct from fees, which should be measured separately.
• It increases in low liquidity markets and when slippage is high.
Common pitfalls
Mixing with fees: Effective spread is about execution, not platform fee schedules.
Using last trade: Use bid, ask, and mid context, not a single print.
Learn more
For deeper explanations and worked examples, see EffectiveSpread.com.