Title says it all. What happens exactly when the bid and ask are the same? Does a trade occur or is this scenario impossible?
This question is impossible answer for all markets but there are 2 more possibilities in my experience:
- Markets with specialists (also called designated market makers) and markets with self-cross protection (SCP) frequently run into the scenario as described. There will be no trade even if order sizes support it. It simply means that party and counterparty are the same.
- Markets which support a minimum quantity run into this scenario quite regularly as well: For instance the bidder wishes to execute in multiples of 500 and sets their minimum quantity to 500, a seller not aware of the minimum quantity sends a limit sell order for 400 units priced on the bid, the resulting quote would be
500 P / P 400(with P being the price in question)
In the world of stock exchanges, the result depends on the market state of the traded stock. There are two possibilities, (a) a trade occurs or (b) no trade occurs. During the so-called auction phase, bid and ask prices may overlap, actually they usually do. During an open market, when bid and ask match, trades occur.
In simple terms, this is how the shares are traded, however most of the times market orders are placed.
Consider below scenario( hypothetical scenario, there are just 2 traders) Buyer is ready to buy 10 shares @ 5$ and seller is ready to sell 10 shares @ 5.10$, both the orders will remain in open state, unless one wish to change his price, this is an example of limit order.
Market orders If seller is ready to sell 10 shares @ 5$ and another 10 shares @5.05$, if buyer wants to buy 20 shares @ market price, then the trade will be executed for 10 shares @ 5$ and another 10 shares @ 5.05$
Rule 610 (Google for it) stands that if Bid and Ask are the same, the market is considered Locked, and the exchange must stop all trading. So the same person can't quote the same bid and ask price. However, HFTs have found ways to circumvent this limitation when exchanges created special order types for them, e.g. Spam-and-Cancel