Bid / Ask
Written by Evan Feng
Introduction
Bid / Ask refers to the combination of resting bids to buy, and offers to sell a financial asset at a given price. It can apply to almost any instrument that has an active market on a venue, whether stocks that trade on the NYSE, or a cryptocurrency that trades on any of the popular exchanges all over the world.
More specifically, a given order book represents liquidity available at that moment in time, constructed from the aggregate market participants who have submitted limit orders to buy or sell at a given price. In market vernacular, bids are “hit” and offers get “lifted” when they are filled by new market orders that “cross” the spread as an expression of new participants who put a greater priority on establishing a long or short position immediately.
Related concepts include the idea of a bid / ask spread, which wider (larger) spreads as a percentage of the underlying price of the asset suggests lower liquidity and higher volatility (few resting orders) characteristic of less efficient markets, while tighter (smaller) bid / ask spreads are oftentimes indicators of a venue and instrument that enjoys greater liquidity, lower volatility (more resting orders).
Lastly, the idea of spoofing refers to the potential for artificial bids and asks to be entered into a given order book without any intention of execution, in order to give the impression of demand or supply that doesn’t exist (the prospective buyers and sellers would automatically cancel their limit order before it actually has a chance to execute) - while this remains a problem for many nascent exchanges, industry players continue to work on ways to detect and prevent this form of artificial market manipulation.
Suggested Reading
What is Bid, Ask, and Last Price in Trading? by Adam Milton
What Is Bid-Ask Price Spread and How Is It Used for Trading? by Brian O'Connell