Are Bid and Ask Prices Accurate? All The Time?

Every so often people will ask if Bid and Ask prices displayed in their trading program are accurate. The answer is sometimes, and sometimes not.

The first point to understand is that their are different types of quote screens that each person may be looking at.

Across the different types of quote screens, prices may be displayed from various locations, or market makers.

At the least accurate level, some people may be looking at delayed price quotes. Up from there would be Level I price quotes. Even further up for NASDAQ stocks would be Level II price quotes.

In addition, an option avalibale to some traders is something called NASDAQ TotalView which provides an even more in depth picture of orders in effect.

No matter what or which level of price quotes you are looking at, they can be misleading at times. So to answer the question "Are Bid and Ask Prices Accurate?", I would have to answer as I mentioend above, sometimes, and sometimes not, so beware.

One of the things to be aware of is that Market Makers (and individual traders with the capability) can hide the total number of shares they actually have in effect for their order. So if they have an order to sell 10,000 shares of XYZ stock, rather than scare others into a panic, they can show it as 100 shares instead.

I know that doesn't effect the accuracy of the prices being displayed, but it sure can effect the movement of prices, in particular future prices, so be aware.

Other times you may be looking at price quotes that only are displying the portion from a small segment of the total orders out there due to the level of order viewing you have access to.

In addition, market makers, or even various traders, will "flash" orders very quickly to try and tempt people to buy, sell, raise their bid or lower their ask prices. This happens often and can get people caught up in the moment and react poorly. When the orders are "flashed", the only intention of the person "flashing" the order is to trick people, not to actually have the order executed.

Here's an example of people "flashing" orders which they never intended to have executed:

Are Bid and Ask Prices Accurate?

This is a snapshot of orders that were placed recently for AAPL (APPLE Stock) right after they released their earnings report. The stock was halted but I took this snapshot less than 5 seconds before it began trading again.

I was watching the orders being placed show up and you'll notice that AAPL closed at $244.59 when it was halted. Shortly before it began trading again, orders wer flowing in at $250, $255, $260, then some $400's came in as you can see. Finally, some brave sould entered an order to buy 200 shares at $1,000 per share as shown in the image.

You know that anyone who was short AAPL was grabbing their chest with one finger on the "Sell at Market" button when they saw that.

Prices wound up going up to the $265.00 or so, area before pulling back some when the stock began trading this particular day.

So when you are looking at price quotes and wondering if the Bid and Ask prices are accurate, stay calm and figure out exactly what you are looking at before making a hasty decision that you may regret later.

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