WHAT IS A Touchline
Touchline is the highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing to sell at any given time in the trading day.
BREAKING DOWN Touchline
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. Currency, for example is considered the most liquid asset, and thus has an extremely low bid-ask spread.
For example, if security A has various buyers who are bidding $5.00, $5.10 and $5.15 for it, the touchline bid price would be $5.15. At the same time, if security A has various sellers at $5.20, $5.30 and $5.35, the touchline ask price would be $5.20. The bid-ask spread on security A is therefore $5.15 for the bid and $5.20 for the ask.
The touchline represents the best bid 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 touchline is the best and often highest bid, but not necessarily the bid at which the security or asset sells.
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 the 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.
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. Less-liquid assets, such as small cap stocks, may have spreads that are equivalent to 1 or 2 percent of the asset's lowest ask price. One of the key elements of the bid-ask spread is a highly liquid market for any security to ensure an ideal price to make a profit.