freespread

Freespread is a term used in financial markets to describe the difference between the bid price and the ask price of a financial instrument. This difference is also known as the bid-ask spread and represents the cost of trading. For example, if a stock has a bid price of $10.00 and an ask price of $10.05, the freespread is $0.05. Traders buying the instrument immediately pay the ask price, and traders selling it immediately receive the bid price. Therefore, the freespread is effectively a transaction cost that is paid to the market maker or liquidity provider.

The size of the freespread can vary significantly depending on the liquidity of the asset. Highly liquid assets, such as major currency pairs in the forex market or actively traded stocks, typically have very narrow freespreads, sometimes even close to zero. Conversely, less liquid assets, such as obscure stocks or less frequently traded bonds, will generally have wider freespreads. This wider spread reflects the greater risk and effort involved in finding a counterparty to a trade.

Factors influencing the freespread include market volatility, the trading volume of the instrument, and the competition among market makers. During periods of high volatility, spreads may widen as market makers increase their bid-ask spread to compensate for potential price fluctuations. Similarly, lower trading volumes often lead to wider spreads. Technology and the increasing availability of electronic trading platforms have also contributed to tighter freespreads over time for many instruments.