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I have the following problem. I am considering the only two possible actions, buy and sell, into an OTC market. I would like to know if it is correct to say that one buys when bid is lower than current ask or current ask is minus than 0 (if we want to represent it graphically). This should mean that one sells when ask is higher than current bid (and current bid should be higher than zero)...

Could you please tell me if it is wrong or right, and give me an example? Conversely, if we consider a marketable buy limit order, which parameter should I consider in order to buy?

Thank you for your help.

Val

Math
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    bid is always less than ask, and neither can be less than 0 unless you're talking about spread trades, so it's unclear what you're asking. In general, you should buy when you think the price will go up, and sell when you think the price will go down. How you can predict which way the price will go is a much harder question... – D Stanley Sep 28 '17 at 15:26
  • Thank you for your reply, D. Stanley.I asked that question, because I was looking for agent based model problems when I saw that the number of asks written in the order book for a non marketable buy limit order was set higher than 0 and the bid lower than the current ask (the best selling price?): this should mean that even if there are selling orders for matching, this can not take place, so the buyer only submits limit orders.However, in another book, there was written that it is the number of bids to be higher than zero in a marketable buy order, not the ask one. What is the correct answer? – Math Sep 28 '17 at 16:29
  • You said: "bid is always less than ask". One more question, if I can: bid is less than the best ask price too, in a marketable buy limit order? – Math Sep 28 '17 at 16:32

1 Answers1

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In a normal correctly functioning market, the bid should always be below the ask.

However there are some exceptions to the rule:

  • If the bid equals the ask (e.g. the same security is traded on multiple exchanges and one exchange has a bid which is the same price as the ask on another exchange) then that is called a "locked" market.

  • If the bid is more than the ask (e.g. the same security is traded on multiple exchanges and one exchange has a bid which is higher than the price of the ask on another exchange) then that is called a "crossed" market; and

  • Sometimes other occasions where you might see a locked or crossed market when really it isn't so, such as if there is a bid which has a flag on it such as 'All or None' which means that it will not be filled until there is sufficient opposing interest to fill the order in its entirety. The fault is in fact the market data source displaying the all-or-none order as a regular order, when really it is a contingent order.

The exchanges and their market participants (particularly market makers) have an obligation to ensure that locked and crossed markets do not occur, and when they do occur, that they remove the quotes that are contributing to locked or crossed markets.

Locked or crossing quotes can occur from time to time as a result of race conditions (e.g. two participants decide to post orders that would lock each other at the same time, without knowledge of the other order).

Less regulated markets (e.g. OTC markets) may not have such rules in place to reduce locking and crossed markets, so in turn you may more often see locked or crossed markets.

xirt
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