Bias in the Effective Bid-Ask Spread

62 Pages Posted: 23 Mar 2017 Last revised: 12 Feb 2019

See all articles by Björn Hagströmer

Björn Hagströmer

Stockholm University - Stockholm Business School

Date Written: Feb 10, 2019


The effective spread measured relative to the spread midpoint overstates the true effective spread in markets with discrete prices and elastic liquidity demand. The average bias is 18% for S&P 500 stocks in general, and up to 96% for low-priced stocks. Furthermore, the bias makes venues that charge high fees to liquidity suppliers appear artificially liquid in reports mandated by Rule 605 of the US RegNMS. Order routing decisions based on such data are thus potentially misdirected. The bias differs across investor types, leading non-sophisticated investors to overpay for liquidity. It also affects liquidity timing, price impact, and liquidity-sorted portfolios.

Keywords: midpoint, micro-price, liquidity demand elasticity, liquidity, illiquidity, Rule 605, NBBO, TRTH

JEL Classification: C15, G12, G20

Suggested Citation

Hagströmer, Björn, Bias in the Effective Bid-Ask Spread (Feb 10, 2019). Available at SSRN: or

Björn Hagströmer (Contact Author)

Stockholm University - Stockholm Business School ( email )


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