A spread that is equal to twice the difference between the midpoint of the bid-ask spread and the price paid (or received) by market participants/ traders. A low measurement of this spread does not indicate a better market liquidity, due to the fact market liquidity is also impacted by the dollar value of the security traded, a trade’s completion time, and slippage in price, etc. However, and with everything else held constant, a better liquidity may materialized if a higher effective spread is accompanied by a larger volume traded in a very short period of time.
An effective spread is a measure of trading costs (as it captures the difference between the price at which a market order is executed and the midquote price). Consequently, it provides a general estimate of the cost of trading based on a benchmark price (represented by the midquote price).
It is also known as an effective bid-ask spread.
