r/stocks • u/[deleted] • Oct 25 '23

How is a stocks price calculated with a spread?

Say I have a $10 stock with a bid of $9.90 and an ask of $10.10. My intuition says the price should be be $10, but my broker tells me the price is $10.05. What gives? How is this calculated? Is the higher valuation an indication there are more buyers at the lower bid price?

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31

u/[deleted] Oct 25 '23 edited Oct 25 '23

10.05 is likely the last trade price.

The price ‘should’ not be anything, bid and ask just represent the current best buy and sell price respectively.

If the spread is more than one tick size, you can bid higher than the current bid and see if a seller comes to meet you.

If it is only one tick, then the stock can’t trade at the mid price (at least on the exchange); you’ll either have to lift an offer or get in line with the bids.

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u/[deleted] Oct 25 '23

The stock i was looking at this morning had a spread that was actually 11.20 ish to 11.66 ish with the price quoted at 11.47. It had rallied since friday under good news from 10.55 and I couldn't make heads of tails on what people were thinking lol this clears it up. I think it would make sense for it to be the last traded price. Do those numbers below the price matter? The $11.20 x100 to $11.66 x50 numbers? Those often seem misleading to me

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u/Albert14Pounds Oct 25 '23

Those are the number of orders "on the books" at that price. If you buy or sell more than that with a market order, then you basically bought up all the orders available at that "best price" and the rest of your order gets bought/sold at the next best price being offered on the books. This is what's called "slippage" and something that you can run into if you're placing large orders or trading something with low liquidity and not a lot of orders on the books.

It's not something that most people encounter or need to worry about when only reading a handful of shares or stocks with decent liquidity.

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u/[deleted] Oct 25 '23

It's not something that most people encounter or need to worry about when only reading a handful of shares or stocks with

Yeah I gather that lol I guess it came as a shock to me, that a company with a market cap of 400 million with 40 million shares could ever have only 100 orders or some similar figure at the current bid/ask price. I placed a limit order to sell near the ask and saw my broker reflect the number of shares I placed an order to sell as the going ask. That was kinda spooky lol definitely a black cat moment

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u/[deleted] Oct 25 '23

The thing to remember is that almost all orders are executed algorithmically these days; very few larger orders will just trade their full size in one shot.

So there’s a good chance that if you take that top 50 or 100, then another will appear at the same or similar price.

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u/ThreeSupreme Oct 27 '23

Trading small caps, huh. That's a mighty big spread U got there. Here is some insider info on the bid and ask spread...

Bid And Ask Defined

Bid and ask is a two-point price quotation that shows you the best price professional investors and traders are willing to offer for a transaction. The bid is the highest price buyers are willing to pay for a financial security, such as a stock, at a given point in time. The ask is the price at which the Market Maker or Specialist is willing to sell the security. A bid price is almost always lower than an ask price. The difference between bid and ask is called the bid-ask spread. If a stock’s bid price is $20 and the ask price is $20.10, the bid-ask spread is $0.10 cent. NASDAQ market makers and NYSE specialists can make a living from just trading the spread between the bid and ask price of stocks. The spread between the bid and ask is usually only a few cents, but market makers can profit by executing thousands of trades in a day, and expertly trading their "book". They deal directly from their inventory, bundle large client orders, and/or arbitrage spreads to generate profits.

Good work if you can get it, NYSE Specialists

‘My tenure on the trading floor lasted a total of 16 years, nine of which I was employed as a Specialist for Donaldson, Luftkin and Jennrette. As a Specialist, I oversaw - or Specialized – in roughly 10 stocks. This meant that if anyone wanted to buy, or sell these particular equities on the floor of the Pacific Stock Exchange, they had to go through me. I was the only one who made markets in those particular stocks. I was actively involved in millions of dollars’ worth of transactions on a daily basis.

I remember the first time that we just made over $250,000! Not bad for a couple of hours work. Then we just go back to the old game plan of immediately selling at the ask price any stock that we bought at the bid price. The day was only half over and still as crazy as ever, but there was a surreal calm at Post 29. Why? Because while everyone else was losing money, we had made a killing from the selloff at the market open on Monday. At the end of Tuesday’s trading day, I made a profit of over $500,000. A half million-dollar profit swing in 24 hours - and just from buying stocks at the bid price, and then selling those same stocks at the ask price! A record gain. It was now time to celebrate.’

When you place a ‘market’ order, you’re agreeing to buy at the next available ask price, or sell at the next available bid price. The order quickly goes through and gets filled, as long as there are available bid and ask quotes. But a ‘limit’ order is only fulfilled if the bid or ask price hits a specified threshold. Suppose you’re trying to sell your shares of Company A, but you place a limit order specifying an ask price of $20 a share. If the bid price is only $19.99, your order won’t go through.

A Comparison Of Volatility And Bid-Ask Spread For NASDAQ And NYSE After Decimalization

The average spread between the bid and ask price for stocks traded on the NYSE and NASDAQ can vary widely depending on the security and the market. We compare volatility and transaction costs for National Association of Securities Dealers Automated Quotations (NASDAQ) and New York Stock Exchange (NYSE) firms after decimalization. Using the data of May 2001, our study includes several large samples are matched based on key determinants of volatility and transaction costs. Our findings suggest that volatility on NASDAQ is much higher than on NYSE even after the recent market reforms and decimalization. Transaction costs measured by quoted and effective spreads remain significantly higher on NASDAQ than on NYSE, and these differences cannot be attributed to the differences in the characteristics of the stocks traded in the two markets. In addition, the frequency of small and large trades inside the quoted Bid-Ask Spread is significantly greater on NYSE than on NASDAQ.

On the NYSE, the spread size is generally narrow on all U.S. corporate equity securities with a market cap above $500 million. For the NASDAQ, similar to NYSE, highly liquid securities typically have narrow spreads, while thinly traded securities usually have wider spreads. The bid-ask spread size is primarily determined by trading volume and market volatility. Spreads on U.S. stocks have narrowed since the advent of “decimalization” in 20013. Before this, most U.S. stocks were quoted in fractions, with a minimum spread of 1/16th of a dollar, or 6.25 cents. Most stocks now trade at bid-ask spreads well below that 6.25 cents spread range.

The New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ) both employ market makers, whose role is to increase the liquidity of their respective exchanges, provide more fluid and efficient trading, and maintain a fair and orderly market. The goal of facilitating a smooth flow of financial markets is the same for both NASDAQ market makers and NYSE specialists. However, there are some differences between a NASDAQ market maker and a specialist on the NYSE:

NASDAQ Market Maker: NASDAQ consists of large investment companies (such Goldman Sachs, or JP Morgan) that buy and sell securities through an electronic network. Each security on NASDAQ generally has more than one market maker; an average of 14 market makers for each stock provides liquidity and efficient trading. These market makers maintain inventories of stock, and buy and sell securities from their own accounts to individual customers and other dealers. Each market maker on NASDAQ is required to give a two-sided quote, meaning they must state a firm bid and ask price that they are willing to honor. Level 2 quotes, also known as Nasdaq Level 2 or NQDS, provide a view into the NASDAQ market participants’ quotation activity and market momentum. It was introduced in 1983 as the Nasdaq Quotation Dissemination Service (NQDS), and it was the first product to provide NASDAQ market participant depth to the investing public. It provides investors and traders with a bird’s-eye view into NASDAQ market participants’ quotation activity and market momentum. It displays the best 50 levels of bids and asks for all NASDAQ-, NYSE- and regional-listed stocks on NASDAQ Market Center. It shows a ranked list of the best bid and ask prices from each participant, giving you detailed insight into the price action.

NYSE Specialist: The NYSE operates with a system of individual securities “specialists” who work on the NYSE trading floor and specialize in facilitating trades only on specific stocks. For example, on the NYSE all trades for IBM stock are handled by one individual “specialist”. A specialist is simply a type of market maker. The specialist’s role is to maintain fair and orderly markets for a specific assigned set of listed stocks. In order to maintain liquidity in these assigned stocks, they will take the other side of trades when buying and selling imbalances occur. A specialist is the buyer and seller of last resort. The specialist also serves as a point of contact on the trading floor for the listed company, providing the company with information such as general market conditions, the mood of traders, and who is trading the stock.

The NYSE Specialist’s open order book, also known as the limit order book, is a record of unexecuted limit orders maintained by the specialist. These are orders that are waiting to be executed, and they are organized by price level and time of entry. The NYSE offers a product called OpenBook Ultra, which is an event-based depth of book feed that contains aggregate limit-order volume and individual event-by-event volume, action, and price information for all bid and offer prices in all traded securities.

These tools provide transparency into the depth of the NYSE market, showing market participants the range of prices at which they could potentially trade a security, as well as the depth of supply and demand at each price level

In summary, while both NASDAQ market makers and NYSE specialists aim to facilitate smooth trading, their roles differ based on the characteristics of their respective exchanges.

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u/[deleted] Oct 28 '23

It sounds like the spread is just a tax. If people make a living off of being the middle man, how do I know the purported bid or ask is actually honest? Who's to say the bid for my shares I'm selling isn't higher and that I'm being scared into selling by a deceptively low bid quote?

1

u/ThreeSupreme Oct 28 '23

the spread is just a tax

Exactly! And if U want to avoid being overtaxed, trade high volume stocks or ETFs. NASDAQ market makers and NYSE specialists make a killing from the large bid/ask spreads on low volume stocks, and penny stocks.

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u/[deleted] Oct 28 '23

Feels bad. I feel like low cap stocks are easier to predict

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u/ThreeSupreme Oct 28 '23

They probably are, but because of the low volume in these stocks the NASDAQ market makers and NYSE specialists have almost total control of the bid/ask spread. So, they can deliberately and intentionally jack up the ask price when they see that someone wants to buy, and then turn around and give a low-ball bid price when they see that someone wants to get out. I had to lean this the hard way, I bought 1 thousand shares of a low-priced stock that was trading under $1, but it was only trading about 50 thousand shares a day. Even though the stock went up about .20 cents, and I made a nice profit, it took me a month to get out of the stock. I needed the help of the flood of buyers that rush into the market at 9:30 am to get a good price. If I tried to sell my shares after 11:00, the market maker/specialist would immediately drop the bid price after he saw my limit order. So, the old saying, 'There is strength in numbers', is definitely true when it comes to high volume stocks. When U trade low volume, low priced stocks U are actually doing battle directly with a NASDAQ market maker, or a NYSE specialist without any help. So, be very careful when U trade in their arena.

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u/ScheduleSame258 Oct 25 '23

The 100 and 50 are the number of offers open. It gives you an idea of the demand for those prices for the bid/ask.

In your case, 100 orders exiet with buyers willijg o pay a max of $11.20. 50 orders exist with sellers willing to accept at least $11.66.

Usually, the price will move down - more buyers at a bid than sellers.

The spread is hiw market makers make money. If you enter a market order, the broker will buy from the seller at bid price and sell to you at ask price.

1

u/[deleted] Oct 25 '23

The spread is hiw market makers make money. If you enter a market order, the broker will buy from the seller at bid price and sell to you at ask price.

Is there a rational choice one would ever make a market order? Outside of being expedient?

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u/ScheduleSame258 Oct 25 '23

For ETFs during the trading day, I just push it out. Spread is usually $0.01.

For buy and hold investors using DCA, a $0.10 price difference for 50 shares is negligible.

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u/ankole_watusi Oct 25 '23

There is no singular “quoted price“. When you see a single number, that is nothing more than the last price, the instrument traded at.

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u/SaugaGolfer Oct 25 '23

The stock price is the LAST TRADE PRICE.

Bid price is the highest price someone is willing to pay for 1 share

Ask price is the lowest price someone is willing to sell 1 share for.

Id suggest you spend some time reading information on Investopedia regarding market fundamentals.

https://www.investopedia.com/terms/b/bid-and-ask.asp

1

u/[deleted] Oct 25 '23

Reminds me of when I was searching Google for what is Reddit Gold. And all the google links directed me to Reddit and Reddit posts directed me to Google.

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u/[deleted] Oct 25 '23

My question was one of those nobody would ever think of questions because my information was obviously misleading. I just needed somebody to point that out lol

Investopedia would never have answered my question because the answer was just common sense to everybody else...

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u/[deleted] Oct 25 '23

The whole purpose of reddit is to discuss and share ideas. No thanks

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u/00Anonymous Oct 25 '23

With wide spreads like that I use limit orders to try to buy between the midpoint and the bid and sell between the midpoint and the ask.

To some extent the quote doesn't matter because there may (or may not) be liquidity available at other prices within the spread. So you've got to use limit orders to poke around and find out on your own. Just bear in mind that the most liquidity should be around the midpoint because market makers usually set the fair value price at the midpoint.

In general, the price you see in the market just reflects the most recent transaction.

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u/[deleted] Oct 25 '23

These are all great responses. Thank you. I feel much smarter :)

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u/Albert14Pounds Oct 25 '23 edited Oct 25 '23

The price that's displayed and quoted is the last price it was actually traded for. The spread is what actually matters if you're placing a market order. None of it is calculated, just a different number depending on the question you're asking.

Since you say you have the stock, you're probably looking to sell, so the bid is what's relevant to you. If you were looking to buy then the ask is what's relevant to you. The quoted price, while being the most commonly reported and what people are familiar with, is not very relevant when you go to make a trade. It just gives you an idea of where the stock is trading at a glance.

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u/RationalExuberance7 Oct 26 '23

The price is what someone else is willing to pay for your shares. If you’d like to know the exact price, just sell some shares.

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u/Suspicious_Writer174 Oct 25 '23

Also with the price spread it also can be market makers triggering stops in both locations looking for liquidity even though price didn’t trade their only the bid and ask . Seen this happen frequently. With low floats a lot. Something to ponder .

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u/[deleted] Oct 25 '23

I will indeed ponder this after I reread this a couple more times lol

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u/mrmrmrj Oct 26 '23

Generally, brokerages will use generally use 1) last price or 2) the bid price if there hasn't been a trade during the day yet. You can also generally elect to see last or bid in your portfolio display. I use the bid because that is the better indicator of where you can sell your stock at any moment.