DEFINITION of 'Proportional Spread'
A measure of a security's liquidity that is calculated by comparing the bid and ask prices quoted in the marketplace. The proportional spread is higher as liquidity decreases to compensate the dealer for the additional risk of creating a market in an illiquid security.
The proportional spread is calculated as the difference between closing ask and bid prices divided by the average price of the bid and ask.
Ask = Highest close in month
Bid = Lowest close in month
Also referred to as a proportional bid-ask spread.
BREAKING DOWN 'Proportional Spread'
The proportional spread is used to give an idea of the average round-trip transaction compensation to dealers. The average transaction cost to the investor is calculated as one-half of the proportional spread. In general, proportional spreads can range from less than 1% to over 5%. For example, the average proportional spread on the New York Stock Exchange was 0.6% in 2003.