What Is a Touchline?
The touchline is the highest price that a buyer of a particular security is willing to bid and the lowest price at which a seller is willing to offer (or sell) at any given time in the trading day. Therefore, the touchline is the spread as represented by the bid and ask price of a security. As the bid and ask move, so does the touchline.
- The touchline is the highest price that a buyer of a particular security is willing to bid and the lowest price at which a seller is willing to offer.
- The highest bid is the touchline bid, and the lowest offer is the touchline offer or ask.
- The difference between the bid and offer (touchlines) is the spread.
Understanding the Touchline
The touchline specifies the best bid or ask for a particular security at any point in time. Very liquid securities will generally have a narrow bid-ask spread, while illiquid securities will have a wide spread. The EUR/USD currency pair, for example, is considered highly liquid and thus has a small bid-ask spread.
If a security has various buyers who are bidding at $5, $5.10, and $5.15, the touchline bid price would be $5.15. This is the highest price someone is willing to post a bid at.
At the same time, if the security has various sellers at $5.20, $5.30, and $5.35, the touchline ask price would be $5.20. This is the lowest price someone is willing to post an offer at. The bid-ask spread on this security is $5.15 for the bid and $5.20 for the ask. The spread, or difference between the bid and ask, is $0.05.
The touchline represents the best bid and/or ask price for a given asset. This relates to the bid-ask spread, which is the amount by which the ask price exceeds the bid price for an asset in the market. The bid-ask spread is essentially the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept to sell it.
The bid-ask spread reflects the supply and demand for a particular asset, with the bids representing the demand and the asks representing the supply. The depth of the bids and asks can have a significant impact on the bid-ask spread, making it widen substantially if one outweighs the other or if both are not robust.
Market makers and traders exploit the bid-ask spread and the depth of bids and asks to net the spread difference. This is one of the main ways traders and market makers bring in a profit. For example, a market maker may bid at $5.10 and also offer at $5.15. If someone sells to the market maker, the market maker will have bought at $5.10. If someone buys from the market maker at $5.15, the market maker will have made $0.05 on each share traded.
The size of the bid-ask spread from one asset to another differs mainly because of the difference in liquidity of each asset. Certain markets are more liquid than others. Some less-liquid assets may have spreads that are up to 1% or more of the bid price.
Example of the Touchline in an Active Stock
The following image is a screenshot of the bid and ask prices in Twitter Inc. (TWTR) at a particular time during the day.
The bid price is the highest bid someone is willing to post at that particular moment, and the ask is the lowest posted price someone is willing to offer at in that particular moment.
The bid and ask prices are not static. Someone may sell directly to the bid or buy directly from the offer, which will remove the shares posted at that price.
In this example, there are 1,000 (10 x 100 shares, or 10 x Round Lot) shares being bid at $40.12. If someone were to sell 1,000 shares to the bid price, the bid price would not be $40.12 anymore, but rather the next highest bid. In a liquid stock, the next bid or offer is usually 1 cent below the current bid, or 1 cent above the current offer. In this case, the next bid would be $40.11 under normal circumstances.
For this image, the bid touchline is $40.12, and the offer touchline is $40.13.