How can the spread vary between traded products?

How can the spread vary between traded products?

• A. Spreads are fixed by the exchange and do not vary.
• B. Spreads can vary widely; for example, a gold futures contract may have a $10 spread while gold bullion could have a $30 spread per ounce.
• C. Spreads depend only on the time of day.
• D. Spreads are always larger for more liquid assets.

Answer: (B)

Spreads reflect how much it costs to trade immediately and depend on how liquid a market is and how it’s structured. Not all markets have the same liquidity or delivery terms, so the difference between the best bid and ask can vary a lot from one product to another. For gold, the futures contract is a highly standardized, exchange-traded product with many participants and tight competition among market makers, which typically yields a relatively small spread—often around a dollar amount like a $10 range in quotes. Physical gold bullion, by contrast, is traded in a less standardized, over-the-counter market with varying dealer inventories, storage and delivery costs, and fewer competing quotes, which tends to produce wider spreads, such as around $30 per ounce. So, spreads aren’t fixed or solely time-of-day dependent; they hinge on liquidity, market structure, and the specific characteristics of the traded product.

Spreads reflect how much it costs to trade immediately and depend on how liquid a market is and how it’s structured. Not all markets have the same liquidity or delivery terms, so the difference between the best bid and ask can vary a lot from one product to another.

For gold, the futures contract is a highly standardized, exchange-traded product with many participants and tight competition among market makers, which typically yields a relatively small spread—often around a dollar amount like a $10 range in quotes. Physical gold bullion, by contrast, is traded in a less standardized, over-the-counter market with varying dealer inventories, storage and delivery costs, and fewer competing quotes, which tends to produce wider spreads, such as around $30 per ounce.

So, spreads aren’t fixed or solely time-of-day dependent; they hinge on liquidity, market structure, and the specific characteristics of the traded product.