Someone may see the bid is higher than ask. He may buy the stock because he thinks its price may go up.
However, in light of the evidence, this situation happens only during an error, close stock market and manipulation.
This post argues that high-frequency traders will catch this anomaly fast.
Anyone who would want to earn in this situation would not prosper.
From the research, trading errors can plunge the stock’s price down to the floor price.
For example, due to fat-finger error, one stock lost 38% of its value.(source).
It was found that the Bid was higher than the Ask. The order might be detected by high-frequency traders and the price plummeted immediately.
As our research points out that there is no news about what happened to the trader. He may have lost his job or something might happen to him.
From that news, trading for oneself is important because one will be responsible to his losses.
What would happen to the investors of the trader, if the price did not increase after such error?
However, someone made money due to that error because the price climbed to 87 pesos again.
Well, someone may monitor that kind of error, but it does not happen often.
Is it worth it?
Don’t do it because it is a waste of time. One should focus more on reliable trading strategies that produce enough signals.
For example, Seller A is asking for $100 to sell his share, will Buyer A say, Okey, will pay $110?
A bid is higher than Ask happens when the seller commits an error. He may have set the wrong price lower than the bid. It is either intentional or not.
Bid Higher Than Ask
Bid higher than ask usually happens when there are more bidders than sellers. More bidders will probably drive the price down when there are no more sellers above the market price, signifying low liquidity above the market. Since liquidity is essential, the market will always follow liquidity.
A higher bid than Ask is an indication that there are fewer sellers at a particular time. When there are fewer sellers, the price is likely to go down unless the buyers are hitting the Ask to get in the stocks.
What is an Ask Price?
It is the lowest price at which the market maker or seller is willing to sell shares of stock. (Source)
Market makers may commit errors and Ask price is lower than expected.
From reading other sources, Bid is higher than Ask because of manipulations. Someone may have arranged with other traders for their own benefit.
From previous research, Insider trading are possible.
People may do unethical things to make money in the stock market.
2. Closed Stock Market
When the stock market is close, Bid is higher than Ask for other stocks because the trading platform is not yet updated.
One should not consider the information important.
Focus on the Volume
From previous experiences, most of the time, Ask is always higher than bid.
So what should people do?
Focus on the volume, instead of the price. A stock trader may have access to the level II quotes. He can see the total volume of Bid and ask.
We researched the issue that when the bid volume is higher than the ask, selling pressure is stronger. (source)
If someone is a day trader, he would look at these information on the trading platform.
It was found that day traders should look at the total volume to predict the movement of the stock price.
Look at the total bid volume below, the volume is higher and the price would likely go down.
Somebody can see why the price dropped by 2.65% because ask volume is low.
However, traders may realize that this technique does not work all the time. He should also consider other factors of stock trading because no method works all the time.
From experiences of traders, support and resistance is important also. They will look at the chart and the bid and ask volumes to predict the price movements.
3. Price Usually Going Down (More Bids Than Asks)
When there are more bids than asks, there is usually a price imbalance because of high liquidity below the market price. The liquidity will drive the market down if the volume is high relative to the average volume traded.
For example, if the average volume in the last five candles is 10,000, it is not significant if the total bid volume is also 10,000.