What is Crossed Market
A crossed market is a situation arising when the bid price of a security exceeds the ask price.
BREAKING DOWN Crossed Market
A crossed market order occurs when a bid price exceeds an ask price resulting in unfavorable terms for the market maker. To understand this market anomaly it is important to first understand how exchanges manage bid and ask quotes.
Bid and Ask Spreads
Bid and ask quotes are a central part of all exchanges. They allow two entities to trade in the open market. Market makers facilitate this trading which can be done by exchange traders or through technology platforms.
In order to facilitate this service market makers seek to earn a profit on each trade. Multiple exchanges exist across the market that facilitate trading in this way through bid and ask matching. Exchanges include NYSE, Nasdaq, ARCA, AMEX and CBSX. Electronic communication networks (ECNs) also exist across the market to serve as market makers as well.
Central to the infrastructure trading process on these exchanges is bid and ask quotes. Bid and ask quotes are generated for a security by market makers seeking to execute trades for investors.
Bid – A bid quote represents the price that a market maker seeks to buy a security. The number of shares a market maker is seeking is also included with the bid.
Ask – The ask price quote represents the price that a market maker is willing to sell a security. An ask price is also associated with a specific number of shares.
Bid and ask quotes are presented from the perspective of the market maker who is responsible for matching a buyer and seller. For a trade to be executed on a market exchange the market maker also earns a profit which requires the ask price to be higher than the bid price. The difference is known as the bid-ask spread and goes to the market maker.
Crossed Market Discrepancies
Crossed market orders inhibit a market maker from completing a trade. A crossed market order occurs when a market maker has a bid price that is higher than an ask price or adversely when an ask price is lower than a bid price. In this situation a market maker is unable to execute the trade until they can find matching buyers and sellers that result in a positive bid-ask spread.
Crossed market orders can also refer to scenarios on a comparable exchange. Any time the security’s bid price exceeds the ask price it is considered a crossed market order.