The bid of a stock is highest price at which a buyer has entered an order to purchase shares. The bid shows up on the order book, which shows all shares being bid to purchase and offered to sell for a particular stock. The bid changes throughout the day, as buyers are willing to purchase shares at different price levels based on demand and expectations for future value.
When a trader enters a buy order on a stock, he is said to be “bidding” a particular price level. A buy order which gets posted to the books is considered a bid, so while normally a stock’s bid refers to the highest price buyers are willing to purchase shares; technically all buy orders are considered bids. The highest priced bid is considered the “national best bid”. It is illegal in most instances for a broker to execute a client’s buy order at a higher price than the national best offer, or to execute a sell order below the national best bid. A market order that removes all posted liquidity on a particular price level will, however, push the national best bid or offer in the direction of the order, and there is no guarantee that the whole order will be executed at any particular price.
Only limit buy orders can post to stock’s books as a bid, since market orders to buy will only remove liquidity being offered. An aggressive buy order that only removes liquidity is not considered a bid.
Most brokers will only display the national best bid and offer for stocks, but a professional trader can view the entire order book and see buyers sitting on all price levels. This lets the trader get more information about the buying interest in the stock at various price levels, and presumably this will lead to a better understanding of the direction a stock will move in the short term. It is important for a trader to have access to view every bid entered to a stock’s books on all ECN light pool markets.
Dark pools of course do not display their order books, but there are ways for traders to test available liquidity in the dark pools to see if these sophisticated buyers are bidding at higher or lower prices than the displayed liquidity on the light pools. If dark pool buyers are bidding at a higher price than is displayed on the light pools, it is a good indication that a large buyer may move a stock’s price up in the near future. If there is no dark pool liquidity being bid at the same price level of the national best bid, it is a good indication that there are no large or sophisticated buyers supporting the current price, and the price may drop in the near future. This is dependent on the liquidity and volume typically transacted in a stock because in some low liquidity instances there may not be significant meaning to dark pool activity.
Dark pool bid discovery and a full order book of light pool bids are important information sources used by professional traders which can give them a huge advantage over retail traders without access to view and test these. We recommend that traders always use professional software platforms with access to dark pools for this reason.
Understanding the Bid-Ask Spread and Liquidity
The bid-ask spread plays a crucial role in determining the liquidity of a stock.
It refers to the difference between the highest potential price a buyer is willing to pay (the bid) and the lowest potential price a seller is willing to accept (the ask) for a security.
A narrow bid-ask spread indicates ample liquidity making it easier to enter or exit positions.
On the other hand thinly traded securities such as penny stocks often have larger bid-ask spreads due to lower liquidity and imbalanced supply and demand.
Market makers including financial institutions benefit from the bid-ask spread as it represents their profit.
They buy at the bid price and sell at the ask price taking advantage of the difference.
Retail traders however may not pay much attention to the bid-ask spread for mainstream stocks but it can be a significant source of profitability for market makers.
It is important for traders and investors to understand the bid-ask spread and consider it when making investment decisions.
Access to information about dark pool bid discovery and a full order book of light pool bids can provide professional traders with a significant advantage over retail traders which is why it is recommended to use professional software platforms with access to dark pools.
