The apparent price oscillation created when consecutive trades alternate between hitting the bid and lifting the offer, even though the underlying value has not moved.
Tape prices alternate between the two sides of the spread, so a series of trades looks like a zig-zag. In statistics computed from trade prices this shows up as spurious negative autocorrelation and inflated realised volatility.
This is why serious measurement uses the midpoint rather than trade prices: the mid is unaffected by which side happened to trade.
Example: prints of 10.02, 10.00, 10.02, 10.00, 10.02 on a 10.00 / 10.02 market suggest 0.2% swings and a busy market. The midpoint was 10.01 throughout. A volatility estimate from those trade prices can overstate true volatility by a large multiple in wide-spread names.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
Educational only, not advice. Spotted an error? Post in Site Feedback.