DEFINITION of Bid Whacker
A bid whacker (or someone who "whacks the bid") is a slang term for a trader or investor who sells securities at or below the current bid price. This may be seen as an abnormal behavior since sellers normally aim for a price somewhere between the bid-ask spread of a price quote. In general, bid whacking is seen as a negative by other sellers since it naively drives the price lower. Still, sellers who urgently need to sell a position will often hit the bid - and may even keep selling subsequent bids in order to fill their entire order.
Bid whacking is in contrast to an "offer lifter" who is willing to pay (lift) the market offer, or higher, in order to fill an order to buy securities.
BREAKING DOWN Bid Whacker
A bid whacker “whacks down the bid” by selling securities at or below the current market bid price, which depending on the market depth will lead to subsequently lower and lower bid prices. Bid whacking tends to upset other sellers since it may temporarily drive down the market price of a security.
Bid whacking most often occurs when a market is rapidly falling and sellers feel a sense of urgency to sell their own positions. In these cases, traders may want to make sure that the shares are sold by the time the order is placed without taking the risk of placing a limit order.
It’s important to remember, however, that not all bid and ask prices are publicly available in Level II quotes or order books. For example, dark pools may contain bids that may not appear on public order books, which could make it more difficult to whack the bid.
Example of a Bid Whacker
Suppose that a stock opens sharply lower due to a bearish earnings announcement and continues to fall sharply. The current bid is $10.00 and the ask is $10.05. A trader or investor who wishes to exit the position at all costs may enter a limit sell order below $9.95 to avoid the risk of the bid falling below $10.00 before their order goes through. This is known as bid whacking since the move encourages shares to fall lower. Alternatively the trader could initiate a market order to sell, ensuring that the order is completed by taking out the liquidity in subsequently lower and lower bids.
It’s important to note that the actual transaction may not occur below $10.00 since the actual shares will be filled at the best possible prices – or the bid at any given time. However, the fact that the investor is openly willing to sell below $10.00 could encourage shares to fall faster than they would otherwise. This is especially true if larger traders are bid whacking in illiquid securities since they may be prone to falling more quickly.