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. 

 

RELATED TERMS
  1. Insider

    An insider is a director or senior officer of a company, as well ...
  2. Inside Days

    Inside days refer to a candlestick pattern that forms after a ...
  3. Crossed Market

    A crossed market is a situation arising when the bid price of ...
  4. Ask

    The ask is the price a seller is willing to accept for a security. ...
  5. Inside Director

    An inside director is a board member who is an employee, officer ...
  6. Insider Trading

    Insider trading is the buying or selling of a security by someone ...
Related Articles
  1. Trading

    What Investors Can Learn From Insider Trading

    Some insider trading is actually legal - and can be extremely telling for investors.
  2. Investing

    The Viability Of Tracking Insiders

    Insider trading use to be profitable, but can it be today? Learn if investors should be paying attention to insiders.
  3. Insights

    How The SEC Tracks Insider Trading

    Although penalties for insider trading are among the stiffest in the world, the number of recent cases filed shows that it may be impossible to eliminate.
  4. Insights

    Insider Selling Isn't Always A Bad Sign

    Are you using insider trading as a signal for your own buying or selling strategy? You may need to reconsider the approach since rule 10b5-1 prohibit trading based on inside information.
  5. Insights

    Should Insider Trading Be Legal?

    Insider trading has become a hot-button issue. Here are some of the pros and cons to making it legal.
  6. Trading

    Defining Illegal Insider Trading

    The better you understand why insider trading can be criminal, the better you'll understand how the market works.
  7. Investing

    Should You Go With High Insider Ownership?

    Can high insider ownership give a false signal?
  8. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  9. Trading

    Trading Calendar Spreads in Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
  10. Insights

    The 3 Biggest Penalties for Insider Trading in the U.S.

    The three large penalties for insider trading in the United States have been handed down in recent years, leading to civil and criminal charges for the culprits.
RELATED FAQS
  1. What do the bid and ask prices represent on a stock quote?

    The bid and ask prices are stock market terms representing the supply, or the shareholder, and demand, or investor, for a ... Read Answer >>
  2. How are open-market different from closed-market transactions?

    Legal insider transactions can take place in two ways: an open-market transaction or a closed-market transaction. Learn the ... Read Answer >>
Trading Center