Twice the distance between your execution price and the midpoint at the time of the trade, measuring what the spread actually cost you rather than what was quoted.
The quoted spread is a menu price; the effective spread is the bill. Trades inside the quote produce an effective spread narrower than quoted, and trades that sweep several levels produce a wider one.
It is the standard measure in rule-605-reports and the natural input to any comparison between venues or brokers.
Example: NBBO 20.00 / 20.04, midpoint 20.02, quoted spread 4 cents. A buy fills at 20.03, so the effective spread is 2 x (20.03 - 20.02) = 2 cents — half the quoted. A 10,000-share buy that averages 20.06 gives 2 x 0.04 = 8 cents effective, double the quoted spread and $400 of cost on the order.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
Educational only, not advice. Spotted an error? Post in Site Feedback.