Posted versus effective spreads. Good prices or bad quotes?

Mitchell A. Petersen*, David Fialkowski

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

153 Scopus citations


When trades are executed inside the posted bid-ask spread, the posted spread is no longer an accurate measure of transactions costs faced by investors. Using two samples of market orders, one based on orders submitted by retail brokers and one based on orders submitted electronically to the NYSE, we document a significant difference between the posted spread and the effective spread paid by investors. For most orders, the effective spread averages half the posted spread. In addition, when the posted spread widens, only 10 to 22% of the increase appears in the effective spread. These results have significant implications for any empirical work that uses the posted spread as a measure of the cost of trading. Our findings also document a significant difference in the expected execution price across exchanges. This finding is robust to controls for the type of order, and implies that U.S. equity markets are not completely integrated.

Original languageEnglish (US)
Pages (from-to)269-292
Number of pages24
JournalJournal of Financial Economics
Issue number3
StatePublished - Jun 1994


  • Effective bid-ask spread
  • Price improvement

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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