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Often times I find that the number of bid and ask quotes presented for a stock are quite small in number. For example, just today I was watching a stock whose bid and ask prices looked very similar to this at one point during the day:

Bid: $3.20 x 22
Ask: $3.23 x 8

I followed the stock (which currently has an average daily volume of over half a million) throughout the day and neither the bid nor ask sizes ever rose to much more than 20. This is not the first time I have seen something like this. Now, if I place a limit order in the situation above for 1000 shares at $3.23 per share, what keeps the stock price from rising drastically and preventing my entire order from being filled? If the ask size is so low (only 8 at this particular price), would I not be able to obtain only 8 shares at $3.23 before the ask price rises to a higher value? At which point the price has already risen and I still have 992 shares to buy?

I have always been under the impression that with higher volume stocks any individual trade will not affect the price much, but seeing how small the bid and ask sizes are, I don't understand how this works. Is this, perhaps, because as my order is being fulfilled more and more ask quotes at $3.23 are being constantly placed?

  • Why do you expect it to rise? – littleadv Mar 4 '14 at 7:02
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    Because everything I have read points toward the fact that the more ask quotes being filled (more buying) drives the price upward. This gave me the impression that as the ask quotes are filled it will rise. Am I thinking this incompletely or in error? – wgrenard Mar 4 '14 at 7:06
  • But you only consider one ask bid, yours.... It all may be working on a large scale, but on a small scale - these things are rarely deterministic. – littleadv Mar 4 '14 at 7:21
  • So you are saying that my filling those 8 bids are not effecting anything on the large scale? I may fill those ask bids but based off of the large scale trading of the market there could be more asks that take their place at the same price, or lower, or higher? – wgrenard Mar 4 '14 at 7:28
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    @ChrisW.Rea - the reason for such small orders showing up as bid/ask is due to large Iceberg orders (hidden orders) being placed for this stock. – Victor Mar 4 '14 at 20:28
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Your last point of more orders coming in to sell at $3.23 could be one reason. Another more probable reason in the situation you are describing could be that hidden orders exist in the market at this particular time. As small amounts are traded more of the hidden order appears on the books. I believe this is called an iceberg order.

Investopedia defines iceberg orders as:

Definition of 'Iceberg Order'

A large single order that has been divided into smaller lots, usually through the use of an automated program, for the purpose of hiding the actual order quantity.

When large participants, such as institutional investors, need to buy and sell large amounts of securities for their portfolios, they can divide their large orders into smaller parts so that the public sees only a small portion of the order at a time - just as the 'tip of the iceberg' is the only visible portion of a huge mass of ice. By hiding its large size, the iceberg order reduces the price movements caused by substantial changes in a stock's supply and demand.

So if the stock has an average daily volume of 500,000 your order for 1000 shares would in no way affect the price movement of the stock.

  • I did not know these so called Iceberg orders existed. Thanks for the link. Are these orders fairly common? What I mean is, are they common enough that we can assume they regularly cause the effect I asked about, or could there be another substantial factor that causes it? I only ask this because I see these small bid/ask sizes very regularly. Even on stocks that are trading on volume over 100 million. Perhaps Chris Rea, who commented on my post could be on to something. Could these numbers I'm saying represent more than one quote each? – wgrenard Mar 4 '14 at 21:22
  • @wgrenard - You will find that it is actually institutions putting on hidden iceberg orders as per my answer. One way to prove this is if you see a small ask order for about 20 or so and you put in an bid order for 1000 at the same price as the small ask order, does only 20 get traded straight away or does the full 1000 get traded straight away. You will find that the whole order will get traded because there is a large hidden order behind the small iceberg order. – Victor Mar 5 '14 at 13:22
  • How does the automated program react quickly enough? My understanding is that the order book determines trading as of the moment it's valid. If at the moment I place a market order for 2000 shares only 100 are available at the current ask, it seems like by the time the automated program fed another chunk to the order book my order would have already taken out all the asks necessary to fill 2000 shares, which might drive the price substantially higher. – Michael Feb 4 '15 at 22:39
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    @Michael - hidden orders are already in the order books, they just are hidden, so if you place a market order for 2000 and a hidden order exists, it will be filled by that hidden order and won't drive the price substantially higher. – Victor Feb 9 '15 at 3:49
  • Ah, I didn't realize the books could actually have hidden orders; I thought it was an artifact requiring the ability to HFT. Is it possible for retail customers to place hidden orders? How does this work? If not, what prevents it? – Michael Feb 9 '15 at 4:01
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In this situation, as you have stated, you will be filled for 8 shares at the ask. what happens next is speculation:

  1. Seeing the huge buy order the seller(s) can raise the ask, so the other 992 shares will not be filled.

  2. More sellers may compete to match your bid, keeping the ask steady at 3.23, or maybe even pushing it lower if they are really desperate to get out.

The reason that high volume stocks are not affected by an individual order so much is because (i think) : in high vol stocks, a lot of people are actively monitoring it, even though the current bid and ask sizes are low. so as soon as you put in your order, those participants may come in to match your bid and this will prevent the price from moving too much

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