Glossary term
Realized Spread
Realized spread is an execution quality measure that compares a trade price with the market midpoint after a short time interval to estimate how much spread a liquidity provider kept after price movement.
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What Is Realized Spread?
Realized spread is an execution quality measure that compares a trade execution price with the market midpoint after a short time interval. It is used to estimate how much of the spread a liquidity provider actually kept after short-term price movement.
The metric is related to effective spread, but it answers a different question. Effective spread measures the cost of the execution at the time of the trade. Realized spread looks later and asks whether the price moved against the liquidity provider after filling the order.
Key Takeaways
- Realized spread measures execution economics after later price movement.
- It is often used in Rule 605 execution quality reporting and market-structure analysis.
- A lower realized spread can indicate that prices moved adversely after the execution.
- It helps separate quoted trading cost from the liquidity provider's realized economics.
- The result depends on the measurement interval and the midpoint used.
How Realized Spread Is Read
Suppose a buy order executes above the quote midpoint. At that moment, the trade has an effective spread cost. If the market midpoint moves higher shortly after the trade, the liquidity provider may have sold just before the price rose. The realized spread is smaller because the later price movement reduced the economics of supplying liquidity.
For a sell order, the direction is reversed. The calculation still compares the execution price with a later midpoint, but the interpretation must respect whether the customer bought or sold.
Realized Spread Versus Effective Spread
Measure | Main question |
|---|---|
Quoted spread | How wide were the displayed bid and offer? |
Effective spread | How far was the actual fill from the midpoint? |
Realized spread | How much spread remained after short-term price movement? |
What It Signals
Realized spread can help analysts understand whether order flow was costly or favorable to liquidity providers. If prices tend to move against a market maker soon after execution, realized spreads shrink. If prices do not move much, more of the initial spread may be retained.
The measure is not a simple investor scorecard. A low realized spread can reflect informed order flow, volatile markets, or adverse selection faced by the liquidity provider. A high realized spread can reflect less toxic flow, wider spreads, or executions where the liquidity provider was compensated for supplying immediacy.
Practical Interpretation
Realized spread is most useful alongside effective spread, price improvement, execution speed, and fill rates. Looking at it alone can be misleading because market centers serve different order types and securities. The stronger analysis asks whether the tradeoff between customer execution quality and liquidity-provider economics is reasonable for the order flow being handled.
The Bottom Line
Realized spread measures what remains of the spread after short-term price movement. It is a market-structure tool for understanding execution quality, liquidity provision, and adverse selection, not a standalone verdict on whether one trade was good or bad.