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Further to the discussion on "Can someone explain a stock's "bid" vs. "ask" price relative to "current" price?"Chris W. Rea answered: In a stock market, the bid and ask are the best potential prices that buyers and sellers are willing to transact at: the bid for the buying side, and the ask for the selling side.

The example he then provided made perfect sense to me, essentially, it means you would want to sell at the highest possible bid and buy at the lowest possible ask. However, what is the point for posting your own bid and ask? Given that you buy at other market participant's ask (not your own bid, which is the price you are willing to pay), and that you sell at other market participant's bid (not your own ask, which is the price you are wiling to sell), anyway?

I hope my question made sense.

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If you want to buy at the lowest ask, and sell to the highest bid, essentially you can achieve it through placing a Market order and you won't need to specify a bid or ask price. If you place a Buy order, your order will be executed to the one with the lowest ask price and vice versa.

As for your comment, you may not necessary want to buy at the lowest ask price. For example, let's say you want to buy Stock X at a price that is 10% lower than the lowest ask price. Then you would place a Limit order, to which you can also set an Expiry date or day order (valid for the day only). Your order will sit there until it has been executed or expired.

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The current bid and ask are where the market is trading now. If either of those prices are acceptable to you then you can have the size that is posted with each quote if your order gets there first. For example, if the quote is:

$24.75 x $24.95 1000 x 600

then you can buy 600 at $24.95 or sell 1000 shares at $24.75

There is the possibility that there are more shares available at those prices because hidden orders mask the true amount of shares being sought after (iceberg order).

If you want to try for price improvement, you can raise the bid or lower the ask. For example, if looking to buy 400 shares @ 24.76 then you will become the bid and the quote will become:

$24.76 x $24.95 400x 600

You will remain the bid until someone else's order increases the bid price. Note that by doing this, you risk the chance of no trade fill at all.

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  • Thanks, Bob! However, I do not quite get your very last part, what did you mean by 'risking the chance of no trade fill at all'? Because from my perspective, the people would sell at market bid previously, that is $24.75, would certainly be less than those who would sell at the new market bid that I just posted, that is $24.76 due to the extra $0.01. So, would you mind elaborating on what am I actually risking? – dvc Aug 18 '19 at 22:32
  • Also, would it matter if I am a market-maker vis-à-vis any market participant? – dvc Aug 18 '19 at 22:36
  • @dvc - Buyers offer to buy at the lower bid. Higher ask is the lowest price that sellers are willing to sell at. If you want a guaranteed fill, you can buy or sell at these prices and get the available size. If you are a buyer and you try for price improvement by bidding $24.76 then if a counter party shows up and is willing to sell at $24.76 (19 cents less than other sellers) then you get a fill. But if no one is willing to do that and price then moves up ($25.00 x $25.20) then you got no fill and must pay up ($25.20) if you want the shares.That's the risk of attempting price improvement. – Bob Baerker Aug 22 '19 at 23:45
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"However, what is the point for posting your own bid and ask?"

You can't. Only market makers can do that. You can only place limit orders that enter into the market makers' order books. Based on this question and your previous question you need elaboration on how markets and market makers work. Non-market makers can never sell above bid or buy below ask. Your limit orders might influence those prices to a small degree (unlikely to have much effect unless you place institutional scale orders). On an exchange you never transact directly with other buyers and sellers. Electronic crossing networks exist for direct transactions between buyers and sellers but they suffer from extremely low liquidity and are mostly reserved for the big boys. Market makers earn their keep by enabling you to have an order filled at any moment. They are always ready to buy or sell. The spread is their compensation for that very valuable service.

"Given that you buy at other market participant's ask..."

No, you buy at market makers' ask.

Think about a used car dealer who is always ready to buy or sell vehicles. They bid lower than they ask. As a member of John Q. Public you cannot normally buy at the dealer cost or sell at the dealer price. The used car dealer is a market maker, just for a far less efficient market.

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  • This answer is categorically incorrect. Anyone who places a order to buy and their price is the highest bid price, they become the market on that side. The same holds true for placed a sell order at a better price. The market maker only controls market prices if there are no other participants willing to trade at better prices. – Bob Baerker Dec 24 '20 at 13:48
  • @BobBaerker technically you are correct, one can become the market by posting high bids or low asks. However few want to do that. Realistically, for liquid securities, prices are set by the MM based on market order imbalances. If there's fewer buyers than sellers the MM lowers the price. If there's fewer sellers than buyers the MM raises the price. – KevinRethwisch Dec 29 '20 at 0:30
  • If I am technically correct then you have just refuted your own answer. Your order imbalance explanation is a special situation that has nothing to do with normal trading throughout the day. With order imbalances, market makers don't arbitrarily "set" the price. For normal trading, the market is an auction and price goes to where the orders take it. Excess buying volume moves price up and vice versa for excess selling volume. When equilibrium is reached, that's where prices level off. If you take out the buy orders on the order book, price drops to the lower priced orders on the order book. – Bob Baerker Dec 29 '20 at 0:47
  • With your explanation, the only way prices can move is by offering to sell below the market or offering to buy above the market. What I describe is not a special situation, it's exactly how the market constantly works. The MM looks at his order book and thinks, at the current price, I have 200 sellers and 190 buyers. I'd better raise the price. They also use limit order information from their order books. That's a simplification, especially when everything is computerized, but the basic principle holds. The MM always sets the price that maximizes trading volume, or at least tries to... – KevinRethwisch Jan 3 at 15:46
  • ... Rarely does one offer to buy higher or sell lower than the current market price. When that happens it's a vanity trade or market manipulation. – KevinRethwisch Jan 3 at 15:47

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