DEFINITION of Inside Market
The inside market is the spread between the highest bid price and lowest ask price among various market makers in a particular security. Typically, price quotes between market makers feature a lower ask and a higher bid than the quotes made to retail investors in the same security. The inside market ensures liquidity in the market.
BREAKING DOWN Inside Market
The inside market works very much like a series of Vegas sports books. If book A accepts an inordinate amount of money on one team, it bets some of that money on the other team, with book B to balance its accounts. This produces stability in the markets, with fewer severe price fluctuations. In a similar manner, the inside market provides price stability to investors.
Highly traded products such as currencies, blue-chip stocks and large ETFs will have small inside markets because of the trade volume. By contrast, financial instruments such as grain and wheat futures and penny stocks will have wide inside markets because they are traded on an irregular basis and liquidity is low.
As volatility rises, the inside market will increase in all financial products due to uncertainty. This was prevalent during the Great Recession when investors looking to exit trades had to cross wide spreads with significant inside markets to execute these deals.