Effective Spread and Realized Spread: Measuring Execution After the Fill
Why measuring execution matters
In prediction markets, many traders focus on being right about direction and ignore execution. But execution is often the difference between positive and negative expected value.
To measure execution properly, you need metrics that use fills, not just quotes:
Start with the mid price (the reference point)
The mid price is the midpoint between the bid and the ask. Mid is not guaranteed execution, but it is a clean reference for measuring how expensive your fills were.
Key idea: spread metrics compare your fill price to mid, because mid approximates the fair quote at that moment.
Effective spread: what you paid at the moment of execution
Effective spread measures the cost of your execution relative to the mid quote at the time you trade.
Intuition:
• If you buy at the ask with no slippage, your effective spread is close to the quoted spread.
• If you buy worse than the ask because the book is thin, effective spread gets larger.
• If you get price improvement (you buy below the ask or sell above the bid), effective spread gets smaller.
Realized spread: what you kept after the market moves
Realized spread measures the effective spread net of subsequent price movement. It asks: after a short time window, did the market move against you (adverse selection) or in your favor?
Intuition:
• If you buy and then the mid price moves up shortly after, realized spread is lower than effective spread.
• If you buy and mid drops shortly after, realized spread is higher (you were likely picked off).
Realized spread is useful because it separates:
• execution cost you paid right now
• information or selection effects that show up right after your fill
Effective vs realized: the clean mental model
Think of the relationship like this:
• Effective spread captures bid ask spread crossing plus slippage at the moment of execution.
• Realized spread adjusts for the price move after the fill and tells you whether you were trading into informed flow.
Both metrics require a mid quote at execution time and a consistent time window for the post trade mid for realized spread.
Where fees fit (and where they do not)
Fees are important, but do not mix them into the definition of effective spread or realized spread.
Fees and trading fee are platform charges. Spread metrics are microstructure metrics.
Best practice:
• compute effective and realized spread from fills and midquote (no fees)
• then add fees separately to compute all in cost and net EV
This separation makes platform comparisons and market comparisons much cleaner.
Price improvement: how it shows up
Price improvement happens when you execute at a better price than the current top quote.
Examples:
• You buy below the ask because your limit order gets filled.
• You sell above the bid because you posted a resting order and got lifted.
Price improvement reduces effective spread, which often improves EV even if your prediction is unchanged.
Worked example (intuitive, no heavy math)
Assume a 0 to 100 market with:
• bid 49, ask 51, so mid is 50
You buy and fill at 51.
• Your execution is 1 point above mid
That distance from mid is the core input to effective spread.
Now look 30 seconds later and mid is 49 (market moved against you).
• realized spread becomes worse than effective because the post trade mid moved down
If instead mid moved up to 51, realized spread improves, suggesting you were not adversely selected.
How to use these metrics as a trader
Use effective spread to answer:
• Are my order choices producing high slippage?
• Is this market actually tradable at my size?
Use realized spread to answer:
• Am I trading into informed flow?
• Do my entries happen right before price moves against me?
Together, they tell you whether your problem is execution mechanics or information timing.
What responsible platforms should surface
Platforms that want long term trust should help users understand execution quality:
• show bid, ask, and mid clearly
• show a simple execution quality indicator or average slippage estimate for typical size
• show fee estimates separately and upfront
• educate users on why last traded price is misleading
This reduces confusion and makes outcomes feel fairer.
Common mistakes
Using last trade as the reference: last trade can be stale. Use mid from bid and ask.
Ignoring time window consistency: realized spread requires a fixed window (for example 30s or 60s).
Mixing fees into spread metrics: keep fees separate for clarity.
Assuming tight spread equals low cost: thin depth can still create high effective spread via slippage.
Takeaway
Effective spread measures what you paid at the moment you executed. Realized spread tells you what you kept after the market moved. Use both, keep fees separate, and you will quickly see whether your trading problems come from liquidity, order choice, or adverse selection.
Related
• Slippage, Price Impact, Execution Risk: Why Good Forecasts Still Lose Money