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I am trying to understand how to size and compare brokers' costs. As per my understanding, they charge customers on either or both spreads and commissions. The latters are straightforward: for each contract a percentage/a fixed amount has to be paid to the broker (two times per round trade, i.e. when entering and when exiting the position): - buying and selling 1 share at 100\$ with 1% commission would result in 2\$ total commissions - buying and selling 1 ES contract (value 50\$) with fixed commission of 3\$ would result in 6$ total commissions

Instead, I cannot get how spread costs work. Can please someone explain the rationale, possibly with numeric examples as above?

P.S.: please also advise whether something above is not correct

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The spread, or Bid-Ask spread indicates the difference between the prices which market participants are willing to sell at (Ask) and willing to buy at (Bid).

If you are selling without any specific instruction (i.e. place a market order at the best possible price), you are going to get the bid price, if you are buying, you are going to do so at the ask price.

Assume the following about a stock: Bid 99.50 - 100.50 Ask

In case you want to buy 1 share, you're going to have to pay 100.50 (Ask). If after a moment you'd change your mind, you'd only get 99.50 (Bid). The spread, in this case 1.00 goes to the market maker.

Similarly, if you intend to buy and someone else intends to sell, you typically pay the Ask and the seller gets the Bid.

If however, you're placing a limit buy order (i.e. a limit on how much you're at maximum willing to pay) at let's say 99.80, and the seller places a regular market order at best price, the trade is executed at 99.80, which saves you 0.7.

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    $\begingroup$ Thank you for your answer, very clear. I have two more questions then: 1) the spread brokerage costs can then be avoided even with a market maker broker just using limit buy orders? 2) the spread fee can be applied only by market maker brokers and not by those that offer direct access to the market? $\endgroup$
    – Stack
    Apr 18, 2020 at 14:35
  • $\begingroup$ Glad I could help: 1) You can set a limit and wait / hope that another trader meets you half way or even more than half way (i.e. they are willing to sell cheaper or pay more for your stock). 2) The spread depends on the exchange or venue (e.g. OTC in a darkpool) you trade on. These differ in how they set the spread but the size also depends on supply and demand. More liquid markets lead to faster and more reliable trade execution, which reduces the risk for the market maker and allows him to set lower spreads. $\endgroup$
    – Andreas
    Apr 18, 2020 at 18:00
  • $\begingroup$ @Stack please consider "accepting" the answer in case it helped you. Thanks! See stackoverflow.com/help/someone-answers or meta.stackexchange.com/questions/5234/… $\endgroup$
    – Andreas
    Apr 19, 2020 at 14:04

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