Realized Spread
Quick Reference
| Property | Value |
|---|---|
| Dimension | execution |
| Category | statistics |
| Version | v1.0 |
| Output Column | realized_spread |
Realized spread: post-trade price reversal / quoted spread — measures true execution cost after adverse selection
Formula
((post_trade_price - trade_price) * trade_direction) / quoted_spread
CDM Inputs
| Column | CDM Table | Description |
|---|---|---|
trade_price | cdm_* | CDM source table |
post_trade_price | cdm_* | CDM source table |
quoted_spread | cdm_* | CDM source table |
trade_direction | cdm_* | CDM source table |
Parameters
This FeatureType has no configurable parameters.
Output
Column: realized_spread
Realized spread as fraction of quoted spread
Market Intuition & Trading Rationale
Realized spread measures the net cost a liquidity provider actually earns after accounting for adverse selection: ((post_trade_price - trade_price) * trade_direction) / quoted_spread. It captures the fraction of the quoted spread that the market maker keeps after the trade's information content moves the price against them.
When a market maker sells at the ask, they hope to buy back lower. If the mid-price rises after the trade (the buyer was informed), the market maker loses — the realized spread is small or negative. If the mid-price stays put or reverts (the buyer was uninformed), the market maker keeps most of the spread — the realized spread is high. Realized spread thus decomposes the quoted spread into two components: the market maker's gross revenue (realized spread) and the information cost (quoted spread - realized spread = adverse selection cost).
A realized spread near 1.0 means liquidity providers capture nearly the full spread — the market has low adverse selection risk. A realized spread near 0 or negative means liquidity providers are losing to informed traders — the market has high adverse selection risk. This is why realized spread is the key metric for market-making strategy viability.
Usage Cases
- Market-making profitability assessment: Calculate realized_spread over a trading session. If it's consistently negative, market making on this instrument is unprofitable — informed flow dominates. If positive and stable, the instrument supports market-making strategies.
- Adverse selection decomposition: Pair with
effective_spread.effective_spreadis the taker's cost.effective_spread - realized_spreadisolates the permanent price impact — the information content that persists. This decomposition is fundamental to understanding execution quality. - Toxicity monitoring: Declining realized_spread over time signals rising adverse selection — more informed traders are entering the market. Use as an early warning to widen quotes or reduce position limits in market-making strategies.
- Venue quality comparison: Compare realized_spread across venues. Higher realized spread means market makers face less adverse selection — the venue has less informed flow. Route market-making strategies to venues with higher realized spreads.
YAML Definition
name: realized_spread
description: 'Realized spread: post-trade price reversal / quoted spread — measures
true execution cost after adverse selection'
category: statistics
dimension: execution
version: v0.9.0 (Beta)
required_inputs:
- trade_price
- post_trade_price
- quoted_spread
- trade_direction
output_column: realized_spread
output_description: Realized spread as fraction of quoted spread
tags:
- execution
- spread
- adverse_selection
parameters: {}
formula: ((post_trade_price - trade_price) * trade_direction) / quoted_spread