SIE (Securities Industry Essentials) Practice Exam

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

Gets wider
Gets narrower
Remains constant
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.