Fundventures In Broken Capital Markets: What Is The Bid/Ask Spread Of This Stock?

Tyler Durden's picture

Submitted by Nanex

What Is The Bid/Ask Spread Of This Stock

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 of course, 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 of living in paradise. Chicago? Much better chance than Hollywood has, but still, good luck. New York? Now your talking baby! You will, unfortunately, have the most frustrating experience. Even though the speed of light costs you only a millisecond or so, 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 of you who used to trade 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 of you who used to trade 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 all 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 the 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 have 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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fortunes Favor's picture

I am not bullish but I caution before we get too negative on equities take a look at credit mkts. Of course Precious Metals are the best answer to the investment question.


Credit Update: Credit Guru MJ Explains Recent Credit Market Behavior and its Implications for Equities


DeeDeeTwo's picture


The stock in question, TDI, trades about 5,000 shares/day. So this activity is meaningless... probably just a test, baby. You have to wonder why Nanex and TD think this is worthy of note.

FlyPaper's picture

So I read the link.  I don't necessarily agree, but it doesn't more than an non-Armageddon opinion.  Last year when everyone was hella-bearish in August, the contrarian play was correct in terms of market direction.    

Can someone enlighten me as to why the large # of negative thumbs on this comment?  

TruthInSunshine's picture

I am collocating a server up Steve Cohen's ass.

It's a messy job, but I have to profit in this environment, and I want to be as close to the quote stuffing action as I am able to be.

Bullionaire's picture're stuffing what where?


Personally, I don't want to be anywhere near this sort of stuffing.



LowProfile's picture

But I'd lend him a bulldozer to do it with (it's leased).

Diablo's picture

dumb question; SAC isnt big into HFT, yes? its guys like james simmons (rennaisance) and getco that are the REAL culprits?


entendance's picture

Why We Will #OccupyWallStreet - A Secretive Banking Elite Rules Trading in Derivatives

Manzilla's picture

Incredibly dishonest. But don't worry since you declared "victory" yesterday this will all get better soon. Pfffff, my ass. There's not a regulator on earth that has the balls to put an end to this dishonesty. It really is disgusting. It sure would be nice if the game was fair though.

macholatte's picture

Your pessimism is well noted, however, throwing stones at your gladiator is foolish.  The end has to start somewhere.


If in fact ZH has been instrumental in bringing the HFT issue to the attention of the authorities then ZH is to be commended, not insulted. May other so called "journalists" take a lesson from what goes on here and get off their asses and do their jobs, not for the money they get paid, but for the ideals they might have had when young, before they themselves became corrupt. The scum that populate the MSM may never get turned around, but that is no reason not to go forward without them. Let the alphabet networks eat ZH dust!



Where the press is free and every man able to read, all is safe.
Thomas Jefferson


The smarter the journalists are, the better off society is. For to a degree, people read the press to inform themselves-and the better the teacher, the better the student body.
Warren Buffett


A free press can, of course, be good or bad, but, most certainly without freedom, the press will never be anything but bad.
Albert Camus


To the press alone, chequered as it is with abuses, the world is indebted for all the triumphs which have been gained by reason and humanity over error and oppression.
James Madison


The press should be not only a collective propagandist and a collective agitator, but also a collective organizer of the masses.
Vladimir Lenin




dcb's picture

Been having this problem a lot lately. my6 strreaming quotes is BATS, bt I trade with vanguard. there is often a large difference between the quoted prices, and sometimes I hit order with vanguard, that don't show up on BATS

Rastadamus's picture

Wasn't there a demand of HFT codes by the SEC? Did I wake up to the news that the USA is Suing a gaggle of banks? DID POTUS GROW A PAIR??? OMG O MY FUCKING GAWD!!@!!

espirit's picture

Nothing more said (rumor) intended to increase CONfidence.  Potus et al grasping for anything to turn burningshitponzi around.

Rastadamus's picture

Oh and Grassley asking Shapiro foor documents they destroyed at the SEC to protect crooks at the banks? WTF!

props2009's picture

What is Suez Canal telling us of World GDP?
Charts: What is Suez Canal telling us of World GDP?

RobotTrader's picture



Any serious investor who trades in junk outside of the S & P 500 is asking for occasional trouble.  That is why I only trade S & P 500 stocks, with very few exceptions.

Just look at the "Flash Crash" in TDI back at the beginning of the month.  And today it is has traded only 2,500 shares.  Clearly, this name is for "Riverboat Gamblers" only.

If John Paulson simply stuck to big cap liquid names, he would not have been blowtorched on crap like Sino-Forest.  It's really that simple.  Investing Basics 101, really....

AccreditedEYE's picture

If John Paulson simply stuck to big cap liquid names, he would not have been blowtorched on crap like Sino-Forest.

uhhh, yeaaahh Robo. BAC is soooo illiquid. The dude can't even perform arbitrage, his bread and butter, as good as some RETAIL ARB mutual funds. I think there are more issues other than just his investment in Sino.

**I do, however, agree his investment in Sino was pure stupidity.**

oa92000's picture

On Friday, August 26, 2011 , trading on TSX in Sino-Forest Corporation (Toronto:TRE.TO) was halted by order of the Ontario Securities Commission. The S&P/TSX index committee has determined that Sino-Forest no longer qualifies to be a constituent of the S&P/TSX Composite Index. As a result, the company will be removed at zero price from the S&P/TSX Composite and Capped Composite.



or  safer just trade ETF...

walküre's picture

Why did Paulson invest in TRE? Geez, I dunno. Maybe because evey broker was issuing strong buy recos?

I can understand Paulson and at least, he got out when Muddy Waters came out.

But what do you make of the billionaire Richard Chandler? Did he have money to burn or what? He bought 5 million shares at about 4 bucks, lost 20 million on a trade that he could have clearly avoided.

Oh well, small change for these guys.

Dick Chandler, the captain of the river boats. LOL.

lieutenantjohnchard's picture

yet you tout tzoo and lulu which aren't s&p 500 members, and expect gentleman jim sinclair to buy them, even as he's a gold guy, not a junk speculator.

belogical's picture

Take a look at SVM. They announced a stock repurchase to break the short position and suddenly fraudulent letters and HFT algo are turned on the,. Where in the hell is the SEC?

svc101's picture

In other words, the NYSE should be moved a few hops away from the quote stuffers, say perhaps to the middle of

the Congo?

HyperLazy's picture

Thats what my market display looks like too!

SheepDog-One's picture

Move right, right, right, OK fleet now DROP! Move left, left, left....

arkm's picture

I must admit I am missing something about HFTs...same here: what is the problem? what are algos trying to obtain with quote stuffing? (I don't believe it's all about NYers being advantaged compared to Hollywood...) what am I gonna tell my friends when we talk about the bad market participants?


walküre's picture

same as the Fed. make money out of nothing. front run the markets, get investors to buy, suck them into transfering the savings of the many for the benefit of the few .. you know the usual, legalized mafia, theft and so on.

Mediocritas's picture


There are two things being discussed here, one is network latency based front-running, the other is bid fishing. In this example, we're just looking at bid fishing.

Bid fishing is nothing new, it used to happen in the days of organic trading too, just much more slowly.

The inside bid in this case is organic, just sitting there relatively patiently waiting to be hit. Meanwhile, the ask is loaded with impatient bots that provide FALSE quotes narrowing the spread in an aim to entice the bid to cross (bid fishing). A seller fishes for bids when s/he wants to offload shares but not at the inside bid. You see this kind of activity when the bid is running out of juice and the ask is getting antsy. If it continues for too long, the ask will start hitting the bid and the trend reverses.

What makes things a bit different now is that in the old days of organic bid fishing, you could actually catch the asks. These days, you haven't got a chance. A bot provides a whole lot of spread narrowing quotes that entice bids to cross, but by the time the bids actually arrive, the quotes are long gone and the order fills at a higher price than expected. Bots 1 Sucker 0.

Another thing that used to happen back in organic land is pulling asks when an eager bidder appears. Nothing new, but in today's botland it is rampant and results in you getting much more screwed than you ever could be against organic traders with slower reaction times. Co-located bots are so damn fast, they can run rings around most orders. Say you get fooled by an apparently decent ask for 50k shares and you place a market order for 10k shares thinking it will fill at the best ask and feeling secure because the order book looks well stacked. Unfortunately for you, the quote was "false", a bid fishing quote and by the time your order arrives, the quote is long gone. You might get a couple of hundred shares executing at the price you expected, then the asks will magically shrink and melt upwards dragging your market order with it, the supposedly well stacked book, disappearing ahead of you. The bot that sold you a couple of hundred shares at the start of the process may even flip to buy and soak up the ask along with your market order for a few thousand shares, then flip to a higher inside ask and offload it all at the tail of your order execution. The bot ends up neutral with a small profit, a profit matching the loss you made paying a higher price than you should have. Without proper timestamping, there's no way to stop this.

The second issue, that this example does not show is that where multiple venues are involved and propagation takes time, a hyperactive bot network with lower network latency than you can see your order in transit through the system, predict where it's going to route to next (ultimately the NYSE) and, with the benefit of better speed, front-run your order in the venue where your order will arrive at next (if it hasn't filled yet). In this case, the bots are exploiting information asymmetries that exist between venues and if such asymmetries get a bit sparse, bots can CAUSE them by spamming the system (similar to a denial of service attack), aka quote stuffing. All this happens on the millisecond scale and, again, can't be stopped without some form of minimum quote life, quote rate limit and system-wide synched timestamping. In this case, the 50k ask that you wanted to hit is just bait and may even get pulled AFTER your 10k bid has launched but before your bid arrives if the bot has better network speed than you. This is how a trader in California gets screwed by a bot in NY.

The people who think all of this is just fine are the same pricks who use aim-bots in first-person shooters and ruin it for everyone else.

Mediocritas's picture

I remember a weird fantasy land in which market orders used to actually soak up the ask to fill before any quotes could be pulled. These days you have to live in fear that your market order might finish filling at an average prices of $999,999,999 when the inside ask was $1 at the time of placement and the book *looked* well stacked (but was actually full of false liquidity).

Proper timestamping and a minimum quote life (or a 1 cent quote fee) would solve all of this. Hell, just a minimum quote life alone would do the trick in this case (but wouldn't prevent propagation-based front-running (need proper timestamps for that)).

ThirdCoastSurfer's picture

To mitigate the problem with HFT's I trade only stocks with a high degree of liquidity but it severely limits my options in because of this "problem".

There are additional problems that these HFT trades create. Their order sizes are probably algo'd for 100 shares or less (again x1,000 orders). In order to cover my commission costs, I generally trade in blocks of 500 or more (and my fills often tell the tale of HFT activity). This is exactly what HFT's are waiting for. You can forget placing a market order.  

In fact, I bet with examination you'd find that a pecking order of exchanges exists such that the public is confined to order submission from certain obvious exchanges and orders that appear from these exchanges are given the least preferable treatment because of the timing issues this article exposes. 

These algo's are very complex but not hard to figure out. It's like the movie Office Space (I think there's one with Richard Pryor as well) where stealing the unrounded fractions of a penny adds up to a fortune when multiplied times millions of transactions. 


gaoptimize's picture

And when trading occurs across planets light-minutes away, and then stars light years apart?  We can refer to Asimov's Foundation Trilogy for some insights into the implications.  The virualized HFT core will collapse and the real perifery, insulated and isolated by distance and time will prosper.  America's western frontier is only 50 ns from the core.

Greater Fool's picture

Thanks very much for this post. In a reasonable world, it would be possible to set and enforce a minimum order duration. Alas, even if you do it on a few equity markets, slimy strategies like this will move to others where there's less activity...thus, perversely, making the strategy more effective....

buzzsaw99's picture

Anyone sets a stop and forgets about it or places a market order is asking to get reamed.

Mediocritas's picture

Exactly. I used to be a day trader once, until the bots came along and we all went extinct (or botted up). These days an organic trader just has to place a limit order and wait to be filled. Works real nice when it's set 50% away from the current price and a flash crash / smash comes along. Otherwise, sucks.

Markets are seriously screwed up when you *can't* place stops anymore for fear of them being hit ridiculously, and you *can't* place market orders for fear of being ripped a new one. Seems the SEC don't give a toss.

buzzsaw99's picture

I feel your pain. Worse, even if you figured out a way to drive those mofos off a cliff they'd just W&R your ass. The SEC's position is to tell everyone to kneel and take it like a man. Not me brother.

zeneta's picture

There are a few things going on here.

I used to do a lot of fishing back in the day. Did a boat load of pre and post market arb'ing as well.

This example looks like bid fishing with a twist. I would suggest they are gaming folks using "direct access" platforms that don't understand how their orders are handled.

A market order, on a direct access platform is actually converted to an IOC, "Immediate or Cancel", it will fill for whatever shares are there when the order matches and the balance is cancelled and replaced at the next best. The time it takes for the order server to get the cancel and return to the best with a new size and price is serious latency.

In this algo, unlike previous algo's I've seen, they scaled into the best and then fell back to where they want to sell. It looks to me, since they are doing this in somewhat obscure names, that someone is testing. It may be a relatively new operation that has recently raised or is trying to raise some cash to trade.

If I had the time and a fast enough connection I'd front run them.


buzzsaw99's picture

excellent commentary though i don't know how one would go about front-running a mirage. It doesn't look like there is a whole lot of trading going on to me.

zeneta's picture

The mirage is real.

I agree that there is not a lot of actual trading going on, that is why it looks like fishing for idiots or other automated systems.

I still maintain this activity is a "testing" algo.

Mediocritas's picture

We're all guilty of fishing.

What you say here reminds me of a core problem with flash orders. Sure, traders can opt out of them in most (all?) direct access platforms, but many traders probably don't even know what's going on at all. The half second ensures that a quote can flash within the dark pool for up to 500ms before propagating, an eternity for a bot to identify a front-running opportunity in the expected propagation pipeline (assuming the order does not fill) and get ahead. This is regulated, forced latency, giving free money to bots at the expense of traders who don't understand what's going on.

IOC feedback loop is just flat out bad I think. As you say, it's too easy to abuse. I'd like to see a proper timestamping system that fills an order based on quotes that were in existence when the bid was originally stamped at the point of origin (prior to propagation). Even if an ask gets pulled, before the order has filled, if the ask was stamped and live when the bid came into existence then it should be obligated to honor. None of this loop-back nonsense that allows bots to dance around orders like cannibals around an old chap in the pot. A timestamped system like that might actually force some intelligence to go into quote creation.

Regarding scaling into a narrower spread, I'm guessing that's just standard incremental (by formula) bid fishing, but the speed it's done at indicates they're used to bid fishing against rival bots that are equally fast.

zeneta's picture

I'm sure you remember when they charged for cancels. Maybe that needs to be reinstated for sub-second cancels.

There is a big problem trying to timestamp orders that are feed from multiple exchanges without a centralized market. Time, as it turns out, is relative.


Mediocritas's picture

Actually yes, I think you're right. The path of minimal resistance, simplest, easiest approach is a minimum quote life with a penalty for breaching it. So a small fee for canceling or editing a quote within a few seconds of creating it would really be quite effective.

slewie the pi-rat's picture

market orderZ get freaking plundered by this shit, Z_n_X, as tyler has already demonstrated w/ yer help 

perhaps no one has answered the question b/c banzai's little cutesie has increased the download time of this page (for luddites)  by...well, you do the math.  even on zH, the priveliged have no regard for the poor and just want to keep giving us "cake" when we're here to eat the "bread"

i'm not sure about your "test" but i'll give it the ole slewie try:  IF the green is the bid, then the bid @ 9:43:13 = ~ 24.73$  if the solid red upper line is the "marlet maker's" ask, then the B-A spread thruout this whole episode is 24.73 bid, 25.00 ask (by the MMaker in TDI)

since many morons use "market orders" (which are necessary at times), a hi-freek can put in bids or asks freely for the stock, as can slewie or anyone else w/ an account @ a "broker".  if you want to buy, you are bidding, sell, you are asking for a bid to match your price, or @ "market" if you don't specify a price.  but a bid or ask, is not the "bid-ask spread";  at least that is what my answer is based upon. 

zeneta's picture

While I would agree with you that the REAL MARKET in this example is 24.73 by 25.00, you can't suggest that an offer below 25 is not real because it was only there for a split second. Or not real because of some Market Maker?

If someone offers stock in, then it's real. The seller is at risk even if only for a spit sec.


If the HFT really wants to sell a long position in an illiquid stock this is what I'd do. (create buyers so your order doesn't crush the stock)

If I "knew" it was a closing transaction I'd be tempted to take that 24.73 bid away from him and throw out a 24.00 bid to catch his panic sell.

StychoKiller's picture

Based on all the comments that I've read so far, it's a good thing I cashed in my Schwab IRA and took the tax penalties, rather than have the 'Droids continue to siphon my pocketbook(s)!

slewie the pi-rat's picture

i didn't say the offers below 25 weren't real.  they are real offers, but they are not a "spread" or part of a "bid-ask" spread, which is the job of the market maker )or specialist before a few years ago. 

the bids you refer to are real and they are part of the market in this stock.  as long as they are within the spread, they might get filled. 

i may be mistaken, but i do think the bid-ask spread consists of a bid and an ask set by a market maker. 

it looks to me that a computer trader came into this 1/4 pt(+?) spread and sold a shitload of stock below 25$ without moving the spread.  since the hi-freek was selling for less than the MM, the HFT got the sales, or most of them

i see what you mean by the 24$ bid, and it might work well under certain scenarioz, but it would be your bid, outside the bid-ask spread, not part of it, imo.  your 24$ bid doesn't change the b-a spread, any more than the HFT's do;  it is just a bid that suits your strategy in a thin market, which this NYSE telephone & data systems stock was kinda in today, if you check the volume.  the low for today was 24.80$ and the hi was abt 25.05$  so you had the right idea, but the wrong end.  maybe next time put in an "outside" bid and ask and hope to be the outlier that gets filled.  the problem w/ that is that there are others much closer to the market, who may see your orders sitting there, and either block them, or shop them. 

i don't think we're disagreeing about what we're seeing here, zeroH, but about the "definition" of bid-ask spread, which i just asked for and got this (google/paste): Definition for bid ask spread:

The bid/offer spread (also known as bid/ask or buy/sell spread) for securities (such as stocks, futures contracts, options, or currency pairs) is the difference between the prices quoted (either by a single market maker or in a limit order book) for an immediate sale (ask) and an immediate ....  More »  Source  (emp. mine)

what is a limit order book?  (google/paste): Definition for limit order book:

A record of unexecuted limit orders maintained by the specialist. These orders are treated equally with other orders in terms of priority of execution..  More »  Source since specialists went the way of the dodo bird abt 5 years (?) ago, i looked for another answer and found this: Central limit order book - Wikipedia, the free encyclopedia which also contains a ref to how this works for OTC under dodd-frank. you may be right.  the "question" seems to imply your kinda answer, but i don't trust tyler and his buddies not to throw curve balls here, at all, as my answer clearly shows since this is NYSE and we have a MM, i'm still leaning toward my answer, but i'm just not positive.  are you? 
zeneta's picture

In 1997, the SEC instituted "Order Handling rules" that required MM's/Exchanges to post customer limit orders for all to see and trade against. Since then, it is the public that is making markets, but not typically both sides.

The spread is, and has always been, a function of risk.

In many cases a tight spread is somewhat artificial, noise if you will, while real size and therefore real dollar risk is established at a much wider spread.

The NYSE Specialist has a mandate that the Nasdaq MM does not. (the rules are different)

The Specialist is charged with maintaining an orderly market. Meaning he must step in and buy or sell when nobody else will. The flash crash is a clear example of how this works. The specialist paused trading in order to buy himself and give other traders the opportunity to join/help him. The "crash" happened on secondary exchanges.

The Nasdaq MM has no mandate and as a result can and does run away from providing a "market" when the risk outweighs the reward. Nasdaq MM's hide behind ECN's which allow them to trade for themselves and against their customers, and at the same time they have a "stub quote" of a penny bid and $1000 offer. I believe when a MM actually quotes a bid/ask using his MMID he must maintain that quote for 5 seconds and when he moves that quote he can't move by more than a certain percentage.

If I were you, I'd avoid reading about how the market works from academia.

Best of luck




shacai's picture

Welcome to .Our company was founded in 2004 and was committed to internet marketing businesses in 2006. Replica Handbags are always in a great demand and sells well. Recently, we launched some new and updated them on our website. Here you can find some scarce Cheap Christian Louboutin shoes, which were difficult to find from other websites. sac à main are also always in hotsale.

We have gotten many great comments from our customers and earn a good NFL jerseys reputation in foreign makerts, more than 90% customers are satisfied with our products and service, till now our online members NFL jerseys are beyond 80,000. As of right now, we currently serve customers from over Christian Louboutin 18 countries, and we are still growing. We really hope to expand our business through cooperation with individuals and companies from around the world.