Bid, Ask & the Spread

On the exam the tell is a quote with two prices and a “size” (e.g., 20.00 (10) – 20.05 (5)), where the parenthetical numbers are round lots of 100 — so 10 means 1,000 shares bid, 5 means 500 offered. The question usually forces you to pick which side the customer hits: a customer selling hits the bid, a customer buying lifts the offer (ask) — and the spread is the dealer’s compensation for committing capital, not a commission, so it isn’t itemized as a separate confirmation charge. Watch the trap that a wide spread means a “bad” stock; it signals low liquidity (thin volume, few market makers), often a small-cap or thinly traded name.

Don’t confuse the spread with a markup/markdown (the principal-capacity charge): the spread is embedded in the dealer’s two-sided quote, while a markup is what’s added over the prevailing market price. Distinguish the inside market — the highest bid and lowest offer across all market makers, i.e., the NBBO — from any single dealer’s quote; best-execution duty (FINRA 5310) is measured against that NBBO. A market order crosses the spread for an instant fill; a limit order can rest inside it. Mnemonic: customers Buy at the Ask and Sell at the Bid — you always take the worse price.