2.5.3. Types of Negotiated Market Quotes
On the Nasdaq and the OTC markets, market makers compete for orders by displaying quotes representing what they want to buy and what they want to sell.
Only firm quotes can be entered into the Nasdaq Market Center.
Bids and asks. A bid is the price at which a market maker is willing to buy a security. The best bid is considered the highest bid because that is the highest price at which a customer could sell a security to the market maker. Of course, a customer wants to sell his security at the highest possible price. An ask, or offer, is the price at which a market maker is willing to sell a security. The best offer/ask price is the lowest one because that is the price at which a customer could buy the security, and the customer, of course, wants to buy the security at the lowest price. The best bid is lower than the best ask from the same market maker. The difference between these is often called the spread, and it represents the market maker’s compensation for taking the risk to hold a security in its inventory.
For securities that trade at more than $1, the quotes are placed at the penny level. For example, at the time of this printing, the bid-ask spread of Google is 1071.19 – 1071.90.
Inside market. The inside market is the highest bid and the lowest ask. The inside market represents the best price that Nasdaq has to offer for clients on a specific security. The inside market is sometimes known as the inside quote and the BBO (best bid and offer).
National Best Bid and Offer (NBBO). The NBBO is the inside market across all national markets and exchanges.
Example: Imagine the following information is displayed in the Nasdaq Market Center, Level II screen, for Microsoft (MSFT):
|
Bid |
Ask |
Size |
|
|
Market Maker A |
20.25 |