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Say we have stock XYZ that costs $50 this second. The bid/ask is 49/51.

If I buy some stocks by setting a buy limit order for 47$, and it succeeds, there is a match; someone is selling the stocks for 47$.

Why would people sell below the current price, and not within the range of the bid/ask?

If anyone asks, I'm a day trader.

  • 10
    If you're a day trader: have you never had the urge to close a big position at the end of the day, or when markets get tough? You should be able to answer your own question out of experience! – hroptatyr Aug 28 '13 at 5:49
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    @hroptatyr Maybe expand your point about closing a position at the end of the day into an answer. I assume a day trader would know about ideas like remaining delta neutral (and thus having the urge to close a position when rebalancing at the end of the day), but it's good to state nevertheless. – John Bensin Aug 28 '13 at 13:42
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    Another possibility here is to consider the case where someone is exercising a call option on a stock and thus whoever is covering that call has to give up the stock at that price. This is part of the risk in writing covered calls is that the stock may be called away. – JB King Aug 28 '13 at 16:36
  • @JBKing does assignment show up in the ticker? Also, this doesn't seem to apply to user913233's question, because he is buying, not calling the stock. – Michael Mar 1 '14 at 16:06
  • @Michael, I don't know. The point of the comment was to demonstrate a way that one could buy a stock at a lower price than what the last trade was. – JB King Mar 1 '14 at 16:48
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Say we have stock XYZ that costs $50 this second.

It doesn't cost XYZ this second. The market price only reflects the last price at which the security traded. It doesn't mean that if you'll get that price when you place an order. The price you get if/when your order is filled is determined by the bid/ask spreads.

Why would people sell below the current price, and not within the range of the bid/ask?

Someone may be willing to sell at an ask price of $47 simply because that's the best price they think they can sell the security for. Keep in mind that the "someone" may be a computer that determined that $47 is a reasonable ask price.

Remember that bid/ask spreads aren't fixed, and there can be multiple bid/ask prices in a market at any given time. Your buy order was filled because at the time, someone else in the market was willing to sell you the security for the same price as your bid price. Your respective buy/sell orders were matched based on their price (and volume, conditional orders, etc).

These questions may be helpful to you as well:

  1. Can someone explain a stock's "bid" vs. "ask" price relative to "current" price?

  2. Bids and asks in case of market order

  3. Can a trade happen "in between" the bid and ask price?

Also, you say you're a day trader. If that's so, I strongly recommend getting a better grasp on the basics of market mechanics before committing any more capital. Trading without understanding how markets work at the most fundamental levels is a recipe for disaster.

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    +1 for the succinct coverage, I'd give another +1 for the advice – hroptatyr Aug 28 '13 at 5:45
  • If I needed to sell now I might sell below market price. – Joshua Nov 3 '16 at 22:00
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Firstly, if a stock costs $50 this second, the bid/ask would have to be 49/50. If the bid/ask were 49/51, the stock would cost $51 this second. What you're likely referring to is the last trade, not the cost. The last trading price is history and doesn't apply to future transactions.

To make it simple, let's define a simple order book. Say there is a bid to buy 100 at $49, 200 at $48, 500 at $47. If you place a market order to sell 100 shares, it should all get filled at $49. If you had placed a market order to sell 200 shares instead, half should get filled at $49 and half at $48. This is, of course, assuming no one else places an order before you get yours submitted. If someone beats you to the 100 share lot, then your order could get filled at lower than what you thought you'd get. If your internet connection is slow or there is a lot of latency in the data from the exchange, then things like this could happen. Also, there are many ECNs in addition to the exchanges which may have different order books. There are also trades which, for some reason, get delayed and show up later in the "time and sales" window.

But to answer the question of why someone would want to sell low... the only reason I could think is they desire to drive the price down.

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    Your explanations are good, +1 for that, but your reasoning as to why someone would sell a stock is nothing but a wild guess, -1 for that, alas. – hroptatyr Aug 28 '13 at 5:48
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    @hroptatyr Nope, traders do try to manipulate the price up or down by taking extreme prices in order to paint the tape. It is not a "wild guess". It is simply the only reason I can see. Feel free to add your own answer if you can see more reasons. – Randy Aug 28 '13 at 13:34
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    @JBKing That's an excellent question. If you wrote a call for 100 at $45 and I bought it and later decided to call you on that option since the stock is trading at $50 and you promised to sell it to me for $45, I don't think it would go through an exchange or ecn order book since it's not an open-market trade. I would simply give you $4500 and you give me 100sh which you already have. Otherwise there would be a lot of long "wicks" on candlesticks on every optionable stock chart. Private trades shouldn't have anything to do with open-market pricing. – Randy Aug 29 '13 at 16:49
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    @JBKing Now if you wrote an uncovered call, then you'd have to go to the open market and puchase the stock to give to me and that purchase would show on the charts. And if I decided to sell the stock you gave to me, that would also show on the charts, but I don't think the trade between us would show. – Randy Aug 29 '13 at 16:51
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    Ok, thanks for the answer. I just viewed as a case where someone would sell below the current price which was the initial question. – JB King Aug 29 '13 at 16:56
5

Why would people sell below the current price, and not within the range of the bid/ask?

There are many scenarios where this is deliberate but all of them boil down to the fact that the top level's bid doesn't support the quantity you're trying to sell (or is otherwise bogus[1]).

One scenario as an example: You're day-trading both sides but at the end of the day you accumulated a rather substantial long position in a stock. You don't want to (or aren't allowed to[2]) be exposed overnight, however. What do you do?

You place an order that is highly likely to go through altogether. There's several ways to achieve that but a very simple one is to look at the minimum bid level for which the bid side is willing to take all of your shares, then place a limit order for the total quantity at that price. If your position doesn't fit into the top level bid that price will well be lower than the "current" bid.

Footnotes:
[1] Keyword: quote stuffing
[2] Keyword: overnight margin (aka positional margin, as opposed to intraday margin), this is highly broker dependent, exchanges don't usually distinguish between intraday and overnight margins, instead they use the collective term maintenance margin

  • Good answer. I tweaked it to add a link to a basic definition of quote stuffing, although a cursory search didn't turn up a suitable summary of overnight maintenance margins. Investopedia has a basic article on margin in general, so if that's good enough, maybe edit it in? – John Bensin Aug 29 '13 at 15:13
  • Thanks, good point, the difference between the margins is mostly found when trading futures or CFDs – hroptatyr Aug 29 '13 at 15:57
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The person may just want to get out of that position in order to buy a different stock, he or she feels may go up faster. There is really a lot of reasons.

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"People" in this case, are large institutional investors.

The "bid ask" spread is for "small traders" like yourself. It is put out by the so-called specialists (or "market makers") and is typically good for hundreds or thousands of shares at a time. Normally, 2 points on a 50 stock is a wide spread, and the market maker will make quite a bit of money on it trading with people like yourself.

It's different if a large institution, say Fidelity, wants to sell, say 1 million shares of the stock. Depending on market conditions, it may have trouble finding buyers willing to buy in those amounts anywhere near 50. To "move" such a large block of stock, they may have to put the equivalent of K-Mart's old "Blue Light Special" on, several points below.

0

This happens on dark pools quite often. If I am a large institutional investor with tens of millions of shares, I may want to unload slowly and limit the adverse affects on the price of the stock. Dark pools offer anonymity and have buyers / sellers that can handle large volume.

In the case of a day trader, they often trade stocks with light volume (since they have large fluctuations that can be quite profitable throughout the session). At the end of the session, many traders are unwilling to hold positions on margin and want to unload fast.

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Occassionaly a trader will make a blatant mistake. A customer calls to buy 100 shares at $10, and the trader by mistake enters "10 shares at $100". You get one very happy seller :-) In the USA, it doesn't happen often for sales, because if the trader offers to sell 10 shares at $100, there will be nobody accepting the other.

In Japan, with one dollar equal to 120 Yen, the same mistake would mean that someone wanted to sell 100 shares at 1200 Yen, and the trader enters 1200 shares for 100 Yen, then you will get a happy buyer, and a massive loss.

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I stock is only worth what someone will pay for it. If you want to sell it you will get market price which is the bid.

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