Effective Spread

It's a measure of trading costs, defined as the difference between the price at which a market order executes and the mid-quote on the market the instant before. 

Formally we have:

Se≡ d(p-m)

where: Se is the absolute effective spread, is the order directionindicetor (1 for buyer-initiated and -1 for seller-initiated trades), m is the mid-quote on the market prior to the transaction executed at price p.

 

Editor: Maria Francesca Nuzzo