Two costs quietly tax every trade you make, and neither shows up as a commission line. The spread is what you pay to cross from the bid to the ask — the price of trading right now. Slippage is what you lose when your order fills at a worse price than you expected. Together they are the real, recurring friction of trading, and understanding them separates traders who keep their edge from those who bleed it away tick by tick.
What the spread is
At any instant the market has a best bid — the highest price a buyer is currently willing to pay — and a best ask, or offer — the lowest price a seller will accept. The gap between them is the bid-ask spread, and it is the highlighted inside market at the centre of the DOM ladder. If the bid is 100.00 and the ask is 100.02, the spread is two ticks: a buyer who wants in immediately pays 100.02, while a seller who wants out immediately gets 100.00. The spread is therefore the instantaneous, built-in cost of demanding immediacy — it exists before any commission and is paid by whoever crosses the market rather than waits.
Why the spread exists
The spread is the compensation earned by liquidity providers for standing ready to trade. A market maker who quotes both a bid and an ask takes on real risk: inventory risk from holding a position that may move against them, and adverse-selection risk from trading against someone who knows more than they do. The spread is their payment for bearing those risks and for the service of always being there to trade against. In a competitive, liquid market many providers compete and the spread compresses toward the minimum tick; in a risky or thin market they widen it to protect themselves. The spread is not a fee skimmed by the exchange — it is the price of the liquidity you are consuming.
What determines spread width
Spread width is a live readout of a market's health. The deepest, most heavily traded instruments — major index futures, large-cap stocks, major currency pairs — quote spreads of a single tick because competition among liquidity providers is fierce. Spreads widen when liquidity is thin, when volatility spikes and providers demand more compensation for risk, when trade size is large relative to available depth, and at times of day when participation drops, such as overnight or around news. A widening spread is itself information: it tells you liquidity is retreating and the cost of immediacy is rising, often just before a volatile move. Reading spread behaviour is a simple, direct gauge of how nervous the liquidity providers are.
The spread as a repeated cost
Because you buy at the ask and sell at the bid, a round-trip trade pays the spread once even if price never moves — enter by crossing to the ask, exit by crossing back to the bid. On a single trade a one- or two-tick spread seems trivial, but multiplied across hundreds or thousands of trades it becomes one of the largest costs an active trader faces, frequently dwarfing commissions. This is why the spread matters most to high-frequency traders and scalpers, whose edge per trade is only a few ticks: paying the full spread to enter and exit can erase the entire profit. The lesson is that the more often you trade, the more the spread taxes you, and the more it pays to provide liquidity rather than take it.
What slippage is
Slippage is the difference between the price you expected when you sent an order and the price it actually executed at. It happens because a market order does not fill at one price — it fills against the best resting orders and then the next-best and the next, walking up or down the ladder until your full size is done. If you send a market buy for more contracts than are offered at the best ask, the remainder fills at higher prices, and your average fill is worse than the quote you saw. Slippage can also be favourable in fast-moving markets, but for most traders it is a persistent cost, and it grows with order size and with how thin the book is.
What causes slippage
Slippage is worst exactly when you can least afford it. A thin order book means little size at each level, so even a modest order eats through several ticks. Fast markets — news releases, the open, breakouts — move the book faster than your order travels, so the price you aimed at is gone by the time you arrive. Large orders relative to available depth guarantee slippage because no single level can fill them. And stop orders are especially exposed: when triggered they become market orders and fire into whatever liquidity remains, which in a fast flush can be far from the stop price. The common thread is that slippage strikes when liquidity is scarce and price is moving quickly.
Managing the spread and slippage
You cannot eliminate these costs, but you can control them. Trading liquid instruments with naturally tight spreads and deep books is the single biggest lever. Using limit orders instead of market orders lets you provide liquidity and earn the spread rather than pay it, at the cost of fill uncertainty; marketable limits cap how far an aggressive order will slip. Sizing orders to the available depth, and slicing large orders over time or with algorithms, keeps market impact down. Finally, avoiding the moments when spreads blow out and books thin — the instant of a news release, the illiquid overnight session — sidesteps the worst slippage entirely. Professionals treat these costs as a budget to be managed, not an accident to be endured.