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What is the Bid/Ask spread of this stock?

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Take a good look at the chart below of the best bids and offers of the stock TDI. The red circles are new best ask prices and each new circle (ask) cancels and replaces the previous one. The green circles are best bid prices -- which never change on this chart. All quotes (both bid and ask) are from one exchange. We selected this example for its simplicity. Many stocks are much more complex to analyze, as there are multiple exchanges involved and all four quote components change: bid price, bid size, ask price, and ask size.

Using the chart below, see if you can answer these questions:

1. What is the Bid/Ask spread of this stock at 9:43:13?
2. What is the average Bid/Ask spread for the time period shown?

We hope that before answering, you took a good look at the time-scale and the number of quote changes occurring each second. This chart shows 2,500 quotes over 14 seconds, about 180 per second, which is tame (much lower) compared to more active stocks which often have thousands of quote changes per second. And like the example above, these high quote rates often occur without any trade executions.

The answer to both questions, is that the Bid/Ask spread depends greatly on where you live. Are you in California? Too bad for you, as the speed of light ensures that most of these quotes will be long gone before you can get to them. In Hawaii? Be thankful you live in paradise. Chicago? Much better chance than Hollywood has, but still, good luck. New York? Now you're talking baby! You will, unfortunately, have the most frustrating experience. Even though the speed of light costs you only a millisecond or two, those quotes are merely an illusion. Once your order actually gets to the exchange, you will be lucky if more than a few hundred shares actually execute at the price that looks to be fair and firm. You see, even working market orders have been known to miss "quote adjustments".

For those that traded in the pits, think of that guy who caused a few out-trades by pretending he didn't see or remember trading with you.
That guy? He's the new HFT guy.

For those that traded in the pits, think of that guy who caused a few out-trades by pretending he didn't see or remember trading with you. Or that he 'canceled' his intention to trade with you, and you weren't fast enough to notice. That guy? He's the new HFT guy. Only now, he can cancel a bid at the speed of light.  And he's also anonymous, which means you won't be able to recognize him next time.  And everyone, except you, seems OK with this. Too bad for you if your connection is another meter away, you need to pony up, or quit your crying.

This rapid cancellation of quotes has never been seen before here on planet Earth. But, hey, get your head out of the sand you Luddite! This is '11 for crying out loud. Get with the times! Everyone else is doing it. 

Think this is hyperbole? Tongue-in-cheek?  Think again. We dare you to see what kind of fills you can actually get in an environment similar to the one with this stock. Not a 100 shares, but the size that appears in the best ask size: in this example, it's 2,200 shares.  Go ahead. Send us an image of your fill from your broker and tell us the symbol, date and time. We'll take a look.

Now, to be clear, we are not advocating "going back to the caves". We are just calling for fairness. Posting a quote that only a select circle of traders can realistically execute against should never have been allowed to creep into our markets in the first place. One way to solve this is having an accurate and reliable timestamp and the knowledge that an order can't just disappear faster than the speed of light. People in California are already subject to a minimum quote life of about 50 ms -- simply because the speed of light prevents them from canceling their quote for that amount of time. So why should someone in New York be allowed to knowingly cancel a quote that was just sent, and not yet seen, by those outside of the inner circle? Pretty stupid (some would say dishonest) if you asked us. Especially when you consider that NBBO stands for National Best Bid or Offer.


Publication Date: September 2, 2011

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