super confused about bid and ask size. help

Question

My understanding of the bid and ask size is very limited, so my first question is...

What are some good books or videos that contain in depth info on how the bid and ask sizes work? ( surprisingly finding in depth info on the bid and ask size on Google is hard to do )

Here is some info I have found about what one can infer about the bid and ask sizes coupled with questions I have or why the info confuses me.

1. A large bid size indicates a strong demand for the stock.

(This confuses me. Couldn't a large bid size mean more of the stock is selling off indicating lowering demand?)

2. A large ask size shows that there’s a large supply of the stock.

(Wouldn't this only be true when measuring relative to outstanding shares? Could it also mean there is simply a large demand for the stock?)

3. If the bid size is significantly larger than the ask size, then the demand for the stock is larger than the supply of the stock; therefore, the stock price is likely to go up.

4. If the ask size is significantly larger than the bid size, then the supply of the stock is larger than the demand for the stock; therefore, the stock price is likely to drop.

(In regards to 3. and 4. is it really this simple? Are there cases when this is not true? What would be some other caveats when following these rules of thumb?)

Answer 1

In the stock market many participants enter orders that are not necessarily set at the current market price of the stock (i.e. they are not market orders, they are limit orders). They can be lower than the market price (if they want to buy) or they can be higher than the market price (if they want to sell). The set of orders at each point of time for a security is called the order book.

The lowest selling price of the order book is the offer or ask, the higher buying price is the bid. The more liquid is a security, the more orders will be in the order book, and the narrower will be the bid-ask spread. The depth of the order book is the number of units that the order book can absorb in any direction (buy or sell).

As an example: imagine I want to buy 100 units at the lowest offer, but the size of the lowest offer is only 50 units, and there is not any further order, that means the stock has little depth.

Answer 2

The principle of demand-supply law will not work if spoofing (or layering, fake order) is implemented. However, spoofing stocks is an illegal criminal practice monitored by SEC. In stock market, aggressive buyer are willing to pay for a higher ask price pushing the price higher even if ask size is considerably larger than bid size, especially when high growth potential with time is expected. Larger bids may attract more buyers, further perpetuating a price increase (positive pile-on effect). Aggressive sellers are willing to accept a lower bid price pushing the price lower even if ask size is considerably smaller than bid size, when a negative situation is expected. Larger asks may attract more sellers, further perpetuating a price fall (negative pile-on effect). Moreover, seller and buyers considers not only price but also size of shares in their decision-making process, along with marker order and/or limit order. Unlike limit order, market order is not recorded in bid/ask size. Market order, but not limit order, immediately affects the price direction. Thus, ask/bid sizes alone do not give enough information on price direction. If stocks are being sold continuously at the bid price, this could be the beginning of a downward trend; if stocks are being sold continuously at the ask price, this could be the beginning of a upward trend. This is because ask price is always higher than bid price. In all the cases, both buyers and sellers hope to make a profit in a long-term and short-term view

Answer 3

The other answers contribute pieces to this puzzle, but there is a bit of detail which is omitted which I think might clarify things a bit more.

As mentioned, for a given security there is this thing call the "order book", which consists of orders to buy and sell the security for specific prices. A such, the order book consists solely of limit orders, with the caveat that the order book is not limited to normal buyers and sellers (traders), but will also contain orders created by market makers. (I would expect this to be almost entirely algorithmic these days). So looking at the bid and ask size at a given moment in time is, practically speaking, useless for predicting the short time price movement of the stock, because individual traders can withdraw or adjust their limit orders at any time, and so can market makers, much faster. High frequency traders would also fall into this category, as a limit order could be placed that only exists on the books for a fraction of a second before it is withdrawn.

Except for a few specific cases, all the action actually takes place due to market orders. The few specific times where this is not true is at times like market open, where there could be bids at or above some asks, and asks at or below bid some bids. These get crossed (matched up) to produce the market price at the open, at which time the highest bid is some non-zero amount below the lowest ask and bid prices decrease from there, while the lowest ask starts at some non-zero amount above the highest bid and asks increase in price from there.

Another specific time where a limit order would cause an immediate trade in the market is if, at the time when the limit order is placed, there is a corresponding order on the books that it can match again. For instance, if I place a limit order to buy at 100 and the best ask price is only 99, I would pay the ask price of 99. When I say "at the time" I mean it somewhat loosely, as there is a notion of ordering, so if I placed the buy order a few milliseconds after another trader placed an identical order, their order would be ahead of mine and execute first, at which point the ask price might have gone up above my limit in which case my order would go into the book. For the point of looking at bid and ask size, we can consider such a limit order the same as a market order - it's not going to show up on the order book for any appreciable amount of time, it's just going to execute as if it was a market order.

When a market order is placed, if it is a buy order, then it's going to be matched against the current best ask until the order exhausts the ask size. (I think it's possible that high frequency trading or other shenanigans like "price improvement" might in some cases actually distort this somewhat, and also different trades can happen on different venues so order routing can affect price (the complete "order book" is actually an aggregation), but in principle this is what happens.) If the order size is less than the ask size, the ask size will decrease by the order size. If it's greater, that line of the order book will be removed and the next higher ask will become the "market price" and the order will start getting matched against that until it is exhausted, etc. When a market sell order is placed, the same thing happens except in reverse, with the bid price. Of course, immediately after the order is executed other participants might make changes to the book again, for instance, a market maker could have an algorithm that in a certain circumstance tries to always keep a certain amount of stock at a certain bid, so you well could sell 100 shares into a bid depth of 1000 and see no change in bid depth, because the depth was "replenished" so to speak.

Note that this means that a very large buy or sell order could "blow through" the existing supply or demand of the stock and cause a large swing in the price. To avoid this, various algorithms may be employed such as parcelling up a large order into smaller pieces. So you could see the same behavior of bid size always seeming to stick around 1000 shares because somebody is trying to sell a large block at that price but is only offering 1000 shares at a time. What size the algorithm picks, as well as any other participants at the price level, can affect what the actual size is.

Bottom line is that the existence of algorithms both for buying and selling stocks in a less disruptive (and hence more profitable) manner and by market makers is often going to negative any useful information that bid and ask size could provide.

Answer 4

yes you are right as per my understanding while doing trade you must consider fol (specially for starters like me)

1. The volume of the stock you are trading in should be high enough to keep you secure for quick in and out

2. Whenever the bid volume is more than the ask volume the prices will move up and vice versa. to give an example if a stock is at 100 points and there are fol bids:

     Bid                  Ask
   1.99                1. 101
   2.98                2. 102
   3.97                3. 103
   

The transaction will occur when either the bidder agrees to pay the ask price (case 1. he pays 101 . his bid offer will disappear and the next best ask will be 102. and the current price will be 101 which was the last transaction.) or when the person giving ask price agrees to deal at best bid which was 99 in which case the share will go down.

3. In this scenario as the market moves on indicators and rumors, then if there is a positive development more people(more volume) will try rather compete to buy same stocks, so therefore for less shares more buyers will be there which will result in stock prices to move up.

Answer 5

limit order become market order once its triggered. you can not cross the spread, at least not in this universe. you may get fills in the middle of the spread. When the bid volume is higher than the ask volume, the selling is stronger, and the price is more likely to move down than up. When the ask volume is higher than the bid volume, the buying is stronger, and the price is more likely to move up than down.

Answer 6

When the number of shares currently Bid is larger than the Ask then the market makers have too little inventory. The reason that they have too little inventory is that there is net buying from the market makers. The stock price would be expected to rise.

When the number of shares currently Ask is larger than the Bid then the market makers have too much inventory. The reason that they have too much inventory is that there is net selling to the market makers. The stock price would be expected to fall.