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I am reviewing some market-maker raw data and sometimes I see the following happening. The market-maker quotes an ask price that is below the current bid price (of let's say, the market itself). How is that possible? What is happening?

An important characteristic of the quotes (ask) that are lower than the current bids, is that they are almost always at the same level. So even though the bid and ask are changing through time, these 'flawed' asks always remain on (approximately) the same price level.

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The primary purpose of the exchange is to execute asks against bids and to provide quotes of asks and bids

I suspect that what you're seeing is a divergence of the quoting system from the execution system in which the quote returned right before an execution making it appear as though there was a disparity. If the exchange did what every market participant depends on it to do, it executed the trade immediately after the quote was processed.

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  • I thought this was it as well, but it's not. The quoted asks are WAY lower than the current bid/ask spread. For example bid/ask is 7.10/7.15 and the asks are quoted at 6.55. Something like that. And as all marketmarkers are obliged to offer at least the best bid/ask, this cannot be it.
    – Jean-Paul
    Oct 2, 2014 at 21:27
  • Perhaps it's an artifact of options executing? What is your source data set?
    – Matthew
    Oct 2, 2014 at 21:31
  • It's not from options. It's just from plain stocks.
    – Jean-Paul
    Oct 3, 2014 at 10:34
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    @Jean-Paul Market makers are not obliged to do anything. Registered market makers are. How do you know that the quote you're looking at is from a registered market maker?
    – dg99
    Oct 3, 2014 at 16:17
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    Gotcha. One reason would be user error (or user software error), but in theory the exchanges do not allow limit orders to appear in the book if they cross the spread. Instead they get filled immediately (at the best available price). However, exchanges and their software are far from perfect, and sometimes weird things happen.
    – dg99
    Oct 7, 2014 at 21:44

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