Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

From http://www.fool.com/ddow/2000/ddow000509.htm

Assume you want to sell some of your shares of EVE at the current "market" price. The lowest ask price from sellers is $16.00. The market maker or specialist buys it from you at that price, hoping to sell it to someone else for at least $16.25. That $0.25 difference between the two prices is the amount the market maker pockets in return for taking the risk of buying the security without knowing with certainty what price she will realistically be able to sell it for.

Fortunately for that market maker or specialist, I offer to buy the stock at the "market price." The market maker looks around and sees that the highest price currently being "bid" by others who are specifying a purchase price is $16.25 so she sells it to me for $16.25.

It seems to say that a market maker buys at the ask price, and sells at the bid price.

But what I have understood before is contrary to the quote: a market maker buys at the bid price, which is the highest price of those prices at which each market maker is willing to buy, and a market maker sells at the ask price, which is the lowest price of those prices at which each market maker is willing to sell.

So I wonder whether a market maker sell (or buy) at a bid or ask price?

Thanks!

share|improve this question
1  
Maybe reading the following question and its answers will help you more than the fool's description. –  Dilip Sarwate Jun 18 '12 at 15:11
    
The BATS exchange has a nice visualization of the order book, with buy orders, sell orders, and last 10 trades. batstrading.com/market_data –  AK. Jun 18 '12 at 15:37
    
The fool site is badly (not quite wrong, just bad) worded. A bid/ask of $16.00/$16.25 means the MM will pay $16.00 and sell it for $16.25. You are correct. –  JoeTaxpayer Jun 18 '12 at 17:48
add comment

3 Answers

up vote 7 down vote accepted

EVERYONE buys at the ask price and sells at the bid price (no matter who you are).

There are a few important things you need to understand.

  1. An order executes ONLY when both bid and ask meet. (bid = ask)
  2. when buying at "market price" = YOUR bid is the lowest ask price on the market.
  3. when selling at "market price" = YOUR ask is the highest bid price on the market.

Example:

EVE bid: 16.00

EVE ask: 16.25

So if your selling EVE at "market price" you are entering an ask equal to the highest bid ($16.00).

If you buy EVE at "market price" you are entering a bid equal to the lowest ask price ($16.25).

Its key to understand this rule: "An order executes ONLY when both bid and ask meet. (bid = ask)."

So a market maker puts in a bid when he wants to buy but the trade only executes when an ASK price meets his BID price.

When you see a quote for a stock it is the price of the last trade. So it is possible to have a quote higher or lower then both the bid and the ask.

share|improve this answer
    
Thanks! “When you see a quote for a stock it is the price of the last trade. So it is possible to have a quote higher or lower then both the bid and the ask.” I wonder if the quote price is related or determined by the bid and ask price, when all these prices are at the same time? –  Tim Jun 18 '12 at 15:49
    
Well in a way it is determined by both. It is the price that a bid and an ask last met. So If my bid of 16 met an ask of 16 the new quote would be 16. However if now the bid is 13 and the ask is 13.20 but never met since 16 then the quote would still be 16. Side Note: When your broker tells you how much $$$ value is on a stock you own they use the bid price because that is the price you sell at. –  Kirill Fuchs Jun 18 '12 at 15:53
    
I would also like to add situations like that are extremely rare in stocks such as aapl or other big companies that have a big market. You can notice things like this more so in options and small stocks that do not have a big market. –  Kirill Fuchs Jun 18 '12 at 15:57
1  
for (2) you maybe thinking about this the wrong way. A transaction does not "fail" it just has not occurred yet. So when the bid price is lower then the ask price there is no transaction taking place. try googling "limit order" and take a look at level 2 quotes this displays bid and ask prices and the amounts of each order. level2stockquotes.com/level-ii-quotes.html –  Kirill Fuchs Jun 18 '12 at 18:51
2  
ask means "Hey I own EVE, I am ASKing for 16.25 for EVE. Anyone want?" –  Kirill Fuchs Jun 18 '12 at 23:48
show 5 more comments

I think your confusion has arisen because in every transaction there is a buyer and a seller, so the market maker buys you're selling, and when you're buying the market maker is selling.

Meaning they do in fact buy at the ask price and sell at the bid price (as the quote said).

share|improve this answer
1  
Is the real time price shown in google.com/finance?q=NASDAQ:AAPL a bid price, a ask price, or neither? –  Tim Jun 18 '12 at 14:27
    
It will be the mid price, the half way point between the two. –  psatek Jun 18 '12 at 14:59
6  
@psatek it is the last price a trade was made on. The bid and ask can both be lower then the quote on the stock if they go lower and no trade was excuted. –  Kirill Fuchs Jun 18 '12 at 15:06
    
What Kirill said. Stock quotes are always last trades. You might sometimes see a mid-point quoted, which is usually called "mark". –  AndrewS Jul 9 '13 at 22:13
add comment

The answer posted by Kirill Fuchs is incorrect according to my series 65 text book and practice question answers. The everyday investor buys at the ask and sells at the bid but the market maker does the opposite. THE MARKET MAKER "BUYS AT THE BID AND SELLS AT THE ASK", he makes a profit form the spread. I have posted a quiz question and the answer created by the Financial Industry Regulatory Authority (FINRA).

To fill a customer buy order for 800 WXYZ shares, your firm requests a quote from a market maker. The response is "bid 15, ask 15.25." If the order is placed, the market maker must sell: A) 800 shares at $15.25 per share. B) 800 shares at $15 per share. C) 100 shares at $15.25 per share. D) 800 shares at no more than $15 per share.

Your answer, sell 800 shares at $15.25 per share., was correct!. A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800-share quote, so the market maker is responsible for selling 8 round lots of 100 shares at the ask price of $15.25 per share.

share|improve this answer
    
Welcome to Money.Stackexchange.com! Please take a look at our About page. Great first answer! –  C. Ross Mar 18 '13 at 16:59
    
The market maker buys at the price where the stock's bid is quoted. When a seller steps in, he does so with an ask that's lower than the stock's current ask. The ask and the bid briefly meet, a trade is cleared, and then the old bid and ask resume. Yeah yeah, the MM buys at the bid -- the quoted bid. For any ONE TRADE, bid = ask. –  AndrewS Jul 9 '13 at 22:10
add comment

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.