InvestorQ : I understand that Indian markets operate on the best bid-ask principle. What exactly that and how is it important to an investor?
sara Kunju made post

I understand that Indian markets operate on the best bid-ask principle. What exactly that and how is it important to an investor?

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Dhwani Mehta answered.
3 years ago
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Trading on the Indian stock markets is on the best deal basis. There are potential buyers who bid (buy) and potential sellers who give ask (sell) prices. Therefore if you want to sell your stock, then your trade will get executed on the basis of the best bid available from the opposite side. Similarly, if you want to buy the stock, then your trade will be executed on the basis of the best ask available from the opposite side. Remember, the trading system is automatically designed to give you the lowest available price when you are buying and give you the highest available price when you are the seller. This ensures that even if you do not specify the price, the trade is automatically executed at the price that is most beneficial to you.
For example, assume that there are 3 ask quotes to sell 2000 shares at Rs.4, a total of 1000 shares at 4.05 and another 1000 shares at Rs.4.10. Now, if you place an order to buy 2000 shares at market, then you will get 2000 shares at Rs.4.00, assuming that nobody else comes between your price-time-priority. But if you place an order on market to buy 3500 shares, then you will get 2000 shares at Rs.4.00, 1000 shares at 4.05 and 500 shares at 4.10. Here we are assuming that there are no undisclosed orders.
Let us now look at a sell transaction. Say, there are 3 bid quotes to sell 1000 shares at 3.60, 1000 shares at 3.50 and 1000 shares at 3.40. If you place an order to sell 800 shares, then you be able to sell the complete lot 800 shares at Rs.3.60. But if you sell 2500 shares then 1000 shares will be executed Rs.3.60, 1000 shares at 3.50 and 500 shares will be executed at 3.40. You will get the best available effective price. Of course, the real market is a lot more complicated as quantity and price changes every millisecond because thousands of players are trading the stock at the same time. The quantity you see on the screen is not the correct reflection of demand and supply because the trading screen also allows you to put hidden orders by disclosing just 10% of your actual order size on the screen. Then there are millions of algos going on which keep throw and withdrawing buy and sell orders. But, the basic logic of the screen is that the trading system ensures that you get the best possible deal, irrespective of whether you are the buyer or the seller of the stock.
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