5 ms·

Why? Clearly, no one is actually willing to trade at those prices. Sometimes, one illogical price in illiquid markets drive the orderbook to illogical extremes.

by gokhan 5y ago

Why? Clearly, no one is actually willing to trade at those prices. Sometimes, one illogical price in illiquid markets drive the orderbook to illogical extremes. Without a transaction, all are meaningless.

benmanns 5y ago
Bids and asks are making bold predictions about the current value of an asset. If they are wrong then anyone can enter the market and make a profit. Bid/ask of 99.90/100.10 means that the true value of the asset is between 99.90 and 100.10, because if it was really worth $100.20 someone would come in and buy up all the offers through $100.19 (give or take a bit for risk management, fees, and minimum profit targets). Usually what happens though in these markets is that the bid/ask is $95/$105 and true value is something like $101 but no buyer wants to pay a $4 spread and no seller wants to pay a $6 spread, so no trades happen. The last price could be $90 from back when the asset was $90/$100 true value around $95 and someone really needed to get out and was willing to pay (or didn’t know).
- deleted 5y ago
  [deleted]
- nly 5y ago
  Yeah kind of. Except market makers can pull liquidity in a microsecond and have higher privileges on many exchanges that retail investors investing through brokers do not. The best measure if pricing in my view is "what average price would I get or slippage would I see if I sold X shares right now?"
andruby 5y ago
But they _are_ willing to trade at those prices. The person who posted the highest bid is willing to buy at that price and the person who posted the lowest ask is willing to sell at that price. Both regardless of the last trade price. The lack of "crossing" between those two doesn't mean no one is willing to trade.
- aliswe 5y ago
  So is your sibling comment wrong in naming them predictions? (edit: inserting disclaimer "serious question" lest i get downvoted)
- jliptzin 5y ago
  Not always; they could just be quote stuffing
  - baobabKoodaa 5y ago
    It doesn't work like that. You can't cancel a bid/ask after someone in the market takes you up on it.
    - jliptzin 5y ago
      You can move your ask up as bids get closer
      - andruby 5y ago
        Sure, but market orders or bids that cross your ask will trigger a transaction at your ask price. I’m sure quote stuffing happens, especially deeper in the order book. Or with very small amounts closer to the cross.
      - baobabKoodaa 5y ago
        The context here was the highest bid / lowest ask. The context was not orders deep in the order book. If your order is the best order available in the book, anyone can just take it, and you will not have any time to move your order before a trade is executed.
deleted 5y ago
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wcoenen 5y ago
The reason I said "it's important to look at the order book" is because otherwise you might enter a market order and expect to get something near the last trade price. Which you won't. I do think the "correct price" is near the middle of the spread though. Because this sort of thing happens not just because of illiquidity, but also because everyone involved knows what the "correct" price is. (E.g. because bonds have very predictable cash flows.) There's no difference in opinion large enough to convince a trader to cross the spread.

by gokhan 5y ago

benmanns 5y ago

Bids and asks are making bold predictions about the current value of an asset. If they are wrong then anyone can enter the market and make a profit. Bid/ask of 99.90/100.10 means that the true value of the asset is between 99.90 and 100.10, because if it was really worth $100.20 someone would come in and buy up all the offers through $100.19 (give or take a bit for risk management, fees, and minimum profit targets). Usually what happens though in these markets is that the bid/ask is $95/$105 and true value is something like $101 but no buyer wants to pay a $4 spread and no seller wants to pay a $6 spread, so no trades happen. The last price could be $90 from back when the asset was $90/$100 true value around $95 and someone really needed to get out and was willing to pay (or didn’t know).

deleted 5y ago
[deleted]
nly 5y ago
Yeah kind of. Except market makers can pull liquidity in a microsecond and have higher privileges on many exchanges that retail investors investing through brokers do not. The best measure if pricing in my view is "what average price would I get or slippage would I see if I sold X shares right now?"

andruby 5y ago

But they _are_ willing to trade at those prices. The person who posted the highest bid is willing to buy at that price and the person who posted the lowest ask is willing to sell at that price. Both regardless of the last trade price. The lack of "crossing" between those two doesn't mean no one is willing to trade.

aliswe 5y ago
So is your sibling comment wrong in naming them predictions? (edit: inserting disclaimer "serious question" lest i get downvoted)
jliptzin 5y ago
Not always; they could just be quote stuffing
- baobabKoodaa 5y ago
  It doesn't work like that. You can't cancel a bid/ask after someone in the market takes you up on it.
  - jliptzin 5y ago
    You can move your ask up as bids get closer
    - andruby 5y ago
      Sure, but market orders or bids that cross your ask will trigger a transaction at your ask price. I’m sure quote stuffing happens, especially deeper in the order book. Or with very small amounts closer to the cross.
    - baobabKoodaa 5y ago
      The context here was the highest bid / lowest ask. The context was not orders deep in the order book. If your order is the best order available in the book, anyone can just take it, and you will not have any time to move your order before a trade is executed.

deleted 5y ago

[deleted]

wcoenen 5y ago

The reason I said "it's important to look at the order book" is because otherwise you might enter a market order and expect to get something near the last trade price. Which you won't. I do think the "correct price" is near the middle of the spread though. Because this sort of thing happens not just because of illiquidity, but also because everyone involved knows what the "correct" price is. (E.g. because bonds have very predictable cash flows.) There's no difference in opinion large enough to convince a trader to cross the spread.