Midspreads

Midspreads are a concept primarily used in financial markets, particularly in the context of trading. They refer to the difference between the mid-price of a security and its last traded price. The mid-price is calculated as the average of the best bid price and the best ask price currently available in the market for that security. Therefore, a positive midspread indicates that the last trade occurred at a price lower than the midpoint between the bid and ask, while a negative midspread means the last trade was at a price higher than the midpoint.

This metric can provide insights into market liquidity and trading activity. A tight midspread, where the mid-price is very close to the last traded price, generally suggests high liquidity and active trading. Conversely, a wider midspread can indicate lower liquidity or periods of price discovery where the market is still determining an appropriate valuation. Traders and market analysts may monitor midspreads to gauge market conditions, identify potential trading opportunities, or assess the efficiency of price formation. It is a dynamic measure that can change rapidly based on supply and demand.