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I am little confused on basic bid-ask concepts.

Let's suppose I have a BUY order i.e I want to buy shares.

I can either place the order at BID price, lower than BID price or higher than bid price.

Now I know, if I place it Display-Higher than bid, I will raise the bid price. If I place it at Bid, I will raise Bid Size. If I place it at lower than bid then what will happen?

Finally, I am confused on how will hidden orders affect the bid price? Will Hidden, Higher than the bid/at Bid /lower than bid affect the Bid price?

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The bid and the ask are the best displayed limit orders. This means non-display orders to buy should not affect the bid, ever. They won't affect the ask unless a transaction occurs. There are four cases, depending on what the order price is.

  • Lower than the bid: There should be no effect on the bid or ask and the order will not execute unless the price falls.
  • At the bid: The displayed bid price and bid size are unchanged. Sellers crossing the spread may sell to the hidden orders but they wouldn't necessarily know they had traded with a hidden order unless they purchased more than the displayed bid size.
  • Above the bid but below the ask: If the order is between the bid and ask, the bid doesn't change, but market orders to sell may execute at a better price than they are expecting.
  • Above or at the ask: The hidden order will execute immediately and change the ask size and possibly the ask price. The bid shouldn't change.

Note that non-display orders are not common and many people don't know about them, but many exchanges do have a non-display option. For example, in a quick search I found info on non-display orders at the NYSE and Nasdaq OMX. I suppose the presence of these options on the markets is an attempt to reduce demand for transactions in dark pools by traders who believe that the presence of their limit orders affects the price indirectly by influencing people who look at the book to infer where prices are going.

Note that hidden orders may be de-prioritized. At least one reference about the Nasdaq indicates that non-display orders have lower priority than display orders at the same price, even if they were submitted earlier. I suppose this is a good idea...incentivizes people not to use hidden orders, which reduce the transparency of the market.

  • Why is Bid size unchanged at the bid? Please note I am looking this problem as a HFT trader myself who is placing the order at the bid price. Wont the bid size change? Again if I place it above the bid price, then I just changed the bid price isnt it? Because now there is a buyer who is willing to pay more than the bid price – user2961712 Sep 18 '16 at 4:19
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    When you say "size" I presume you mean "displayed size," which is not affected by non-display orders. Is that what you meant? Information on the true size is known only to the exchange. – farnsy Sep 18 '16 at 4:58
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If you make a bid lower than any of the existing sell orders, then the bid will just sit there until someone acts on it and sells to you at that price, which could be 1 second from now or forever.

Hidden orders do not affect the bid price. The "bid price" is simply the highest price being currently offered publicly for the good.

If there is some secret buy order higher than bid price, then the bid price does not change.

Note that there should be no "hidden" orders in an honest exchange, because if such orders existed then it would cause anomalies such as phantom executions. For example, let's say that that there are 3 orders: a buy order for 100 at 20, a sell order for 200 at 22 and a secret buy order for 50 at 21. Now, someone enters a market order to sell 100. Then, what will happen is that 50 will be executed at 21 and and 50 will be executed at 20. This will be confusing to the market participants because the question will arise, where was the bid at 21? If the answer is: it was secret, that will piss everybody off. As far the major exchanges are concerned, there are no "secret" orders for that reason.

  • Going by this logic, Let's suppose I am selling stock now. Do hidden orders don't affect ask price as well? Also you need to correct the first line I suppose? I am making a bid lower than the Current BID price. So shouldn't it be existing buy orders? – user2961712 Sep 18 '16 at 3:16
  • @user2961712 If you bid price is lower than any sell orders, then it will be unmatched and will not execute. – Five Bagger Sep 18 '16 at 3:29
  • okay last question, Let's suppose I am selling stock now. What if I place DISPLAY order at ask price then it changes ask size. If I place it at lower than ask price then I change the ask price and if I change it above the ask price then nothing is changed. Am I correct? – user2961712 Sep 18 '16 at 4:17
  • @user2961712 yes – Five Bagger Sep 18 '16 at 12:23

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