SIE (Securities Industry Essentials) Practice Exam

How does the spread between bid and offer typically change as volume increases?

1. Gets wider

2. Gets narrower

3. Remains constant

4. Becomes unpredictable

The correct answer is: Gets narrower

As the volume of trades increase, the competition between buyers and sellers typically increases as well. This increased competition often leads to a narrower spread between the bid and offer prices, as buyers are willing to pay slightly more and sellers are willing to accept slightly less to complete a trade. When the volume is low, the competition is also low, so the spread between bid and offer is typically wider. Additionally, a constant spread would indicate a lack of changes in market conditions, while an unpredictable spread would indicate erratic fluctuations in demand and/or supply.