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From Fool.com: How Are Stock Prices "Set"?:

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!

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    Maybe reading the following question and its answers will help you more than the fool's description.
    – Dilip Sarwate
    Commented Jun 18, 2012 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.
    Commented Jun 18, 2012 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.
    – JTP - Apologise to Monica ♦
    Commented Jun 18, 2012 at 17:48
  • @AK. - Did you mean the order book: markets.cboe.com/us/equities/market_statistics/book_viewer
    – Emond
    Commented Jan 29, 2018 at 13:48
  • The story in the link should be moved to Idiot-dot-com. It's a terrible explanation of the market making process. Despite that, read the answer below by Nicholas Flyte. It's spot on.
    – Bob Baerker
    Commented Oct 2, 2020 at 17:42

5 Answers 5

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EVERYONE buys at the ask price and sells at the bid price (no matter who you are). You need to understand a few important things.

  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 you're selling EVE at "market price", you're 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).

It's 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.

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  • 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
    Commented Jun 18, 2012 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
    Commented Jun 18, 2012 at 15:53
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    The bid price is ALWAYS lower then the ask price, if it is not that means a trade occurred which means now the bid is lower then the ask. You have to understand that today markets are handled mostly electronically so things happen VERY quickly. So when a bid and an ask match they are almost instantly transformed into a transaction. If you put a "limit order" to buy for higher then the ask price then your broker will just give you the best deal they can get which is the current lowest ask price.
    – Kirill Fuchs
    Commented Jun 18, 2012 at 18:47
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    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
    Commented Jun 18, 2012 at 18:51
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    ask means "Hey I own EVE, I am ASKing for 16.25 for EVE. Anyone want?"
    – Kirill Fuchs
    Commented Jun 18, 2012 at 23:48
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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 from 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, B) 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.

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  • Welcome to Money.Stackexchange.com! Please take a look at our About page. Great first answer!
    – C. Ross
    Commented Mar 18, 2013 at 16:59
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    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
    Commented Jul 9, 2013 at 22:10
  • This is a quote from investopedia "Price takers buy at the ask price and sell at the bid price, but the market maker buys at the bid price and sells at the ask price." investopedia.com/terms/b/bid-askspread.asp
    – Ario
    Commented May 5, 2021 at 15:40
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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).

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    Is the real time price shown in google.com/finance?q=NASDAQ:AAPL a bid price, a ask price, or neither?
    – Tim
    Commented Jun 18, 2012 at 14:27
  • It will be the mid price, the half way point between the two.
    – psatek
    Commented Jun 18, 2012 at 14:59
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    @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
    Commented Jun 18, 2012 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
    Commented Jul 9, 2013 at 22:13
  • In the absence of competitive bids and competitive asks, the market maker sets the market. Any market participant who offers a higher bid or an lower ask becomes the market on that side, even both sides if so inclined. Investors and traders willing to trade at the current prices will transact with a counter party who is either the market maker or another trader.
    – Bob Baerker
    Commented Oct 2, 2020 at 17:27
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The everyday investor buys at the ask and sells at the bid but the market maker does the opposite

This quote from Ryan's answer is misleading; it has nothing to do with being either an investor or a market maker. It is dependent on the type of order that is submitted. When a market trades at the ask, this means that a buy market order has interacted with a sell limit order at the limit price. When a market trades at the bid, this means that a sell market order has interacted with a buy limit order at the limit price.

An ordinary investor can do exactly the same as a market maker and submit limit orders. Furthermore, they can sit on both sides of the bid and ask exactly as a market maker does. In the days before high frequency trading this was quite common (an example being Daytek, whose traders were notorious for stepping in front of the designated market maker's bid/ask on the Island ECN).

An order executes ONLY when both bid and ask meet. (bid = ask)

This quote from Kirill Fuchs is completely incorrect. A transaction occurs when an active (marketable) order is matched with a passive (limit book) order. If the passive order is a sell limit then the trade has occurred at the ask, and if it is a buy limit the trade has occurred at the bid. The active orders are not bids and asks.

The only exception to this would be if the bid and ask have become crossed.

When a seller steps in, he does so with an ask that's lower than the stock's current ask

Almost correct; he does so with an order that's lower than the stock's current ask. If it's a marketable order it will fill the front queued best bid, and if it's a limit order his becomes the new ask price. A trade does not need to occur at this price for it to become the ask.

This is wrong, market makers are the opposite party to you so the prices are the other way around for them.

This is wrong. There is no distinction between the market maker and yourself or any other member of the public (beside the fact that designated market makers on some exchanges are obliged to post both a bid and ask at all times). You can open an account with any broker and do exactly the same as a market maker does (although with nothing like the speed that a high frequency market-making firm can, hence likely making you uncompetitive in this arena). The prices a market maker sees and the types of orders that they are able to use to realize them are exactly the same as for any other trader.

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Market Makers are essentially just there to process the buys and sells of traders, so just like you and I buy and sell at the ask and bid prices they do to. They are just completing the process of making our orders a reality. Market makers are just representative of brokers, meaning that when you place your order at ask or bid, you are placing that particular brokers order at ask or bid. People often say that certain brokers have too many shares and claim that they are games when really that just means that there happen to be a lot of people using a particular broker all at once, or more troubling, perhaps even company execs using a broker, to sell a large amount of shares.

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    This is wrong, market makers are the opposite party to you so the prices are the other way around for them. In exchange for making profit on this (the "spread") they take on the risk of being left with inventory when the market moves against them.
    – GS - Apologise to Monica ♦
    Commented Nov 28, 2014 at 8:53
  • This answer is incorrect in multiple ways.
    – Bob Baerker
    Commented Oct 2, 2020 at 17:22

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