Fees vs Spread: The Two Costs Most Traders Mix Up
Two costs, two different sources
In prediction markets, most people underestimate costs because they mix two separate things:
• Fees (platform charges)
• Bid ask spread (market microstructure cost)
If you separate them, you can measure costs correctly and avoid false edge.
What fees are
Fees are charges set by the platform. They are not a property of the market itself.
Common fee styles include:
• Trading fee as a fixed fee per contract
• Trading fee as a percent of notional
• Maker taker schedules where adding liquidity and taking liquidity have different fees
Fees change your net result even if the market is perfectly liquid.
What spread is
The bid is the best buy price. The ask is the best sell price. The gap between them is the bid ask spread.
Spread is not a platform fee. It is the price you pay for immediacy and liquidity. If you buy now, you usually pay ask. If you sell now, you usually hit bid.
Why this mix up matters
Spread can be small while fees are large. Or fees can be small while spread is large. If you do not separate them, you cannot compare markets, compare platforms, or set correct break even thresholds.
Effective spread is a clean microstructure metric
Effective spread measures execution cost relative to the mid price. It is a microstructure metric.
Important: effective spread is usually defined without fees. You measure effective spread from fills and midquote, then you add fees separately to get all in cost.
If you want deeper microstructure details and calculators, see EffectiveSpread.com.
All in cost: the number you actually trade against
All in cost is the combined effect of:
• spread cost from crossing bid ask
• fees charged by the platform
• slippage when size pushes you beyond the top of book
This is the cost that determines whether your edge survives.
Worked example: tight spread, expensive fees
Market shows bid 49, ask 51 (0 to 100 scale).
• spread = 2 cents
You buy at 51. Your forecast says 55 percent, so your raw edge is 4 points.
Now add fees:
• if total fees on entry and exit are 3 cents combined, your effective break even can move from about 51 to about 54
Suddenly your 55 percent forecast is only barely above break even. Small edges die fast when fees are meaningful.
Worked example: low fees, wide spread
Another market shows bid 46, ask 54.
• spread = 8 cents
Even if fees are near zero, buying at 54 is expensive. If you later need to exit, you may pay the spread twice. In wide spreads, execution can dominate everything.
How to compare markets and platforms correctly
Use this method:
• Step 1: Convert executable quotes into implied probability. Use ask if you plan to buy now, bid if you plan to sell now.
• Step 2: Estimate spread cost and slippage for your size.
• Step 3: Add platform fees based on your order type (maker vs taker).
• Step 4: Compute break even probability from the all in price.
• Step 5: Only trade when your predicted probability clears break even by a margin.
Common mistakes
Using last trade as the price: last trade can be stale. Use bid and ask.
Assuming tight spread means cheap: fees can still make it expensive.
Assuming low fees means cheap: wide spreads and slippage can dominate.
Not planning the exit: if you will exit early, include the second spread crossing in your cost model.
Takeaway
Fees and spread are different costs with different causes. Measure them separately, then combine them into all in cost. That is the only way to compute real break even probability and avoid trading on fake edge.
Related
• Expected Value and Break-even Probability: Costs Turn Beliefs into Math
• Fair Price and Edge: Turning Beliefs into Trade Thresholds
• Slippage, Price Impact, Execution Risk: Why Good Forecasts Still Lose Money