Title says it all. What happens exactly when the bid and ask are the same? Does a trade occur or is this scenario impossible?
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1This is a good one to work out for yourself. What orders would have to be placed to make this happen?– Nate EldredgeCommented Jun 21, 2017 at 23:53
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15If you go to the store and want to buy milk for $2 and the store sells it for $2... does this trade occur or is it impossible?– NuWinCommented Jun 22, 2017 at 0:25
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2@NuWin I think the OP's "or is this scenario impossible" means "is it ever possible for bid and ask to be the same" and not "if they were the same, would it be impossible to trade". I.e. do the mechanics of a market allow the two prices to be precisely the same?– TripeHoundCommented Jun 22, 2017 at 8:28
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To be fair, it's most likely that when the bid is placed it's filled immediately, so you would never see an "equal" bid-ask in the wild. So if the question is "will I ever see a zero bid-ask spread on a quote" the answer is "probably not".– D StanleyCommented Jun 22, 2017 at 13:58
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4 Answers
This question is impossible answer for all markets but there are 2 more possibilities in my experience:
- Markets with specialists (also called designated market makers) and markets with self-cross protection (SCP) frequently run into the scenario as described. There will be no trade even if order sizes support it. It simply means that party and counterparty are the same.
- Markets which support a minimum quantity run into this scenario quite regularly as well: For instance the bidder wishes to execute in multiples of 500 and sets their minimum quantity to 500, a seller not aware of the minimum quantity sends a limit sell order for 400 units priced on the bid, the resulting quote would be
500 P / P 400(with P being the price in question)
In the world of stock exchanges, the result depends on the market state of the traded stock. There are two possibilities, (a) a trade occurs or (b) no trade occurs. During the so-called auction phase, bid and ask prices may overlap, actually they usually do. During an open market, when bid and ask match, trades occur.
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I have seen times in open market when bid and ask do appear at the same price, but it is usually only for a very short period.– VictorCommented Jun 22, 2017 at 20:05
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@Victor, this could be a glitch in your market data feed or you have not been looking at a regulated market or, the market was in an auction state. we would need to know more, where did you see this? Commented Jun 23, 2017 at 12:17
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It is on the ASX. It is not a regular occurance but it does happen ocasionally and it is not during the auction period.– VictorCommented Jun 23, 2017 at 13:33
In simple terms, this is how the shares are traded, however most of the times market orders are placed.
Consider below scenario( hypothetical scenario, there are just 2 traders) Buyer is ready to buy 10 shares @ 5$ and seller is ready to sell 10 shares @ 5.10$, both the orders will remain in open state, unless one wish to change his price, this is an example of limit order.
Market orders If seller is ready to sell 10 shares @ 5$ and another 10 shares @5.05$, if buyer wants to buy 20 shares @ market price, then the trade will be executed for 10 shares @ 5$ and another 10 shares @ 5.05$
Rule 610 (Google for it) stands that if Bid and Ask are the same, the market is considered Locked, and the exchange must stop all trading. So the same person can't quote the same bid and ask price. However, HFTs have found ways to circumvent this limitation when exchanges created special order types for them, e.g. Spam-and-Cancel
