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According to Investopedia:

By looking for trades that take place in between the bid and ask, you can tell when a strong trend is about to come to an end. This is because these trades are often placed by large traders who take a small loss in order to make sure that they get out of the stock in time.

A trader when buying needs to buy at the ask price and when selling needs to sell at the bid price. So how can a trade happen 'in between' the bid and ask?

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    There is not a fixed bid price and fixed ask price. There are multiple orders with different numbers of shares and bid (or ask) prices. A large trader who wants to get out of a stock before the price falls even farther may be willing to sell for a price less than he is asking, or be willing to accept several buy offers of small lots at different bid prices in order to get rid of his large number of shares. – Dilip Sarwate May 24 '13 at 12:56
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    Isn't it true that market makers and hedge funds can buy stocks in between the bid and ask price ? They may do this in order to keep the stock from going up and to accumulate...Frequently you will see this – user15094 May 19 '14 at 14:31
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    I realise this comment is late to the game, but this may also be referring to pegged orders. It is possible to peg an order to a price somewhere between the bid and ask, eg the midpoint, and this order will be resting in the order book but won't show up in the market data. If someone tried to cross the spread and trade against the far side, the pegged order will be filled first. The liquidity taker gets a better price because he pays only midpoint rather than the far side of the spread. The liquidity maker gets filled at worse than the near side best price. – Steve Lorimer Jun 1 '16 at 18:31
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Re:

A trader when buying needs to buy at the ask price and when selling needs to sell at the bid price. So how can a trade happen 'in between' the bid and ask?

Saying the trade can happen "in between" the bid & ask is simplistic. There is a time dimension to the market. It's more accurate to say that an order can be placed "in between" the current best bid & ask (observed at time T=0), thus establishing a new level for one or the other of those quoted prices (observed at time T>0).

If you enter a market order to buy (or sell), then yes, you'll generally be accepting the current best ask (or best bid) with your order, because that's what a market order says to do: Accept the current best market price being offered for your kind of transaction. Of course, prices may move much faster than your observation of the price and the time it takes to process your order – you're far from being the only participant.

Market orders aside, you are free to name your own price above or below the current best bid & ask, respectively.

  • If you were to enter an order to sell at a price that is lower than the current best ask, or,
  • If you were to enter an order to buy at a price that is higher than the current best bid,

... then one could say that you are placing an order "in between" the bid and ask at the time your order is placed. However – and this is key – you are also moving one or the other of those quoted prices in the process of placing your above-bid buy order or your below-ask sell order.

Then, only if somebody else in the market chooses to accept your new ask (or bid) does your intended transaction take place. And that transaction takes place at the new ask (or bid) price, not the old one that was current when you entered your order.

Read more about bid & ask prices at this other question:


(p.s. FWIW, I don't necessarily agree with the assertion from the article you quoted, i.e.: "By looking for trades that take place in between the bid and ask, you can tell when a strong trend is about to come to an end." I would say: Maybe, perhaps, but maybe not.)

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    Also a lot of limit orders are not made public, so as soon as the public bid/ask price moves, it can trigger a computer to make order public to much the new price. This can all happen in a faction of a second. – Ian Sep 18 '15 at 10:12
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    Not to mention large stock brokers doing "off market" trading between their customers if it gives BOTH customer a better price. – Ian Sep 18 '15 at 10:13
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All the time. For high volume stocks, it may be tough to see exactly what's going on, e.g. the bid/ask may be moving faster than your connection to the broker can show you.

What I've observed is with options. The volume on some options is measured in the 10's or 100's of contracts in a day. I'll see a case where it's $1.80/$2.00 bid/ask, and by offering $1.90 will often see a fill at that price. Since I may be the only trade on that option in the 15 minute period and note that the stock wasn't moving more than a penny during that time, I know that it was my order that managed to fill between the bid/ask.

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I can think of the following situations in which one could see a trade occur between the visible best bid & offer:

1) on a public exchange, people have posted hidden limit orders with either bid prices above the best visible bid or offers below the best visible offer, and incoming orders have executed against this hidden liquidity[1];

2) some orders may have been matched in dark pools which offer "mid-point matching" where buy and sell orders are matched using the mid-point of the best available publicly posted bid and offer as the reference price, and which executed trades are then reported to the public markets; or

3) some internalising broker has traded off exchange directly with a client and is now reporting the trade to the public as is often required.

Now how exactly any of the above situations indicates that a "trend is about to come to an end", I do not know.

[1] Exchanges often match orders on a price/visibility/time basis, whereby the orders are prioritised by price (better prices get to trade first), then by visibility (visible orders get to trade first) then by time (first come, first serve).

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As far as i understand the big companies on the stock markets have automated processes that sit VERY close to the stock feeds and continually processes these with the intention of identifying an opportunity to take multiple small lots and buy/sell them as a big lot or vice/versa and do this before a buy or sell completes, thus enabling them to intercept the trade and make a small profit on the delta. With enough of these small gains on enough shares they make big profits and with near zero chance of losing.

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    I'm not entirely sure this answers the question; you're talking about high-frequency trading, correct? By definition, even a high-frequency trader can't trade between the bid and ask price. Their data may be more recent (by milliseconds, perhaps) than the average trader, but they're still bidding and asking on the security. – John Bensin May 29 '13 at 21:59

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