What Is Hit The Bid?
"Hit the bid" is a term used when a trader agrees to sell at the bid price, the highest price a buyer is willing to pay for a security or asset. The "bid-ask" spread is the difference between the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept. An individual looking to sell will hit the bid if they wish to transact immediately at that price.
Hit the bid can be contrasted with "lift the offer."
- "Hit the bid" means that a trader sells at the prevailing bid price in a market.
- The bid is the highest price that a buyer is willing to pay for a security.
- One will hit the bid if they are willing to sell at the best bid price using a market order.
- If a seller is not willing to hit the bid, they may instead opt for a limit order offered at a higher price.
How Hit The Bid Works
To hit the bid is to sell a security to another party at its bid price. This price represents the highest price among competing bidders for the security at the moment.
A trader will hit the bid if they think it is an attractive price, or if they must sell quickly. To hit the bid, the most effective method is to enter a market order to sell, although a sell limit order set at the current bid price is also possible to avoid selling lower than the prevailing bid.
This is because in addition to the price that people are willing to buy, the amount or volume bid for is also important for understanding the liquidity of a market. Bid sizes are typically displayed along with a level 1 quote. If the quote indicates a bid price of $50 and a bid size of 500, that you can sell up to 500 shares at $50. If the best bid is for 100 shares and you have 500 to sell, hitting the bid with a market order will fill the first 100 shares at that price, but the additional 400 shares will be sold at progressively lower levels until the order is filled.
Price quotes will often show the national best bid and offer (NBBO) from across all exchanges that a security is listed. That means that the best bid price may come from a different exchange or location than the best ask price.
Example of Hitting the Bid
For example, a portfolio manager has a junk bond to sell. The portfolio manager calls a junk bond broker to solicit bids for the junk bond. The broker calls prospective buyers and immediately works up a bid of $75 for the bond. The broker communicates this bid to the seller. The seller declines.
Another bid comes in from the market maker for $74, and the seller again declines. Later, the broker goes back to the seller with a $74.50 bid. The seller hits the bid and sells it at the requested price. The other side of hit the bid is lift the offer. To lift an offer is to purchase a security. In this scenario, the trader buying the junk bond from the portfolio manager is lifting the offer from the broker.