What does average effective spread measure?

Average effective spread is a measure of the liquidity of a security’s market. It is calculated by taking the difference between the actual price at which a trade occurs and the midpoint of the bid-ask spread at the time of the trade. This metric provides insights into how easily a security can be bought or sold in the market without causing significant price changes. A narrower average effective spread typically indicates a more liquid market, as it suggests that there are more buyers and sellers and that transactions can be executed close to the market price.

In contrast, other options focus on different concepts. Investment viability pertains to the overall attractiveness of an investment, which is not directly related to the costs of trading or liquidity. Market volatility refers to the fluctuations in the price of securities over time, while the cost associated with buying securities encompasses transaction fees but does not specifically measure liquidity. Therefore, average effective spread is fundamentally tied to the concept of market liquidity, making it the most fitting answer among the options presented.