INSIDE THE MARKET · CHAPTER 03
Bid, Ask, Spread and Depth
Read a quotation, understand the cost and capacity represented by the spread and available depth, and explain why liquidity changes.
Buyers bid. Sellers offer.
The last traded price is not the same thing as the prices currently available to buy and sell.
The best bid is the highest currently available buying price in the displayed market. The best ask, or offer, is the lowest currently available selling price. A seller seeking immediate execution normally interacts with buying interest near the bid. A buyer seeking immediate execution normally interacts with selling interest near the ask.
The market has a width
Spread measures the distance between immediate displayed buying and selling prices, not the full cost of every possible trade.
The quoted spread is the difference between the best bid and best ask. It can reflect tick size, competition, volatility, information risk, inventory risk and the cost of supplying liquidity. A narrow spread does not guarantee unlimited liquidity. A wide spread does not by itself prove manipulation. The conditions behind the quotes matter.
A price is available only for a quantity
Never read a price without asking how much is available at it.
A quotation is paired with size. If the best ask shows 100 shares, a buy order for 1,000 shares cannot assume all 1,000 will execute at that price. The first 100 may fill there. The remainder must find additional selling interest, wait, reroute or cancel according to the order instructions.
The next prices matter too
The best quote describes the front of the queue, not the entire market.
Market depth describes buying and selling interest available at multiple prices. The top of book shows the best bid and ask; deeper levels show what may be encountered if an order consumes the first level. Depth is a snapshot. It can grow, shrink or move as participants submit, cancel and execute orders.
Walking through the book
Size relative to available depth helps determine execution cost.
An incoming buy that is large enough may execute against the best ask, then the next ask, and then a higher level. This is often described as walking the book. The order receives several fills, and its volume-weighted average execution price may be worse than the first displayed ask.
The first quote is not always the average fill
Execution quality is measured from real fills, not from the most convenient chart price.
Slippage is the difference between an expected or reference price and the price actually achieved. It can arise from limited depth, changing quotes, latency, volatility, gaps or the size and urgency of the order. Slippage can be favourable or unfavourable, although learners often notice only the unfavourable case.
Easy to trade—until conditions change
Liquidity always depends on instrument, time, venue and size.
A liquid market can absorb ordinary trading with relatively small price impact. Liquidity is not a permanent property. It varies with time, news, volatility, participant activity and order size. The same instrument may be deep during an active session and thin minutes later. An order small for one market may be enormous for another.
What you see is not all that may trade
Order-book depth is evidence of current displayed interest, not a complete prediction of future supply and demand.
Some trading interest is displayed publicly; some is hidden, partially displayed, internalised or supplied only after an incoming order arrives. Displayed orders may also be cancelled before execution. This means a visible book is useful but incomplete. A large displayed wall can vanish, while additional interest can appear at a level that previously looked thin.
Less depth means a larger footprint
A large candle may reflect limited nearby liquidity as well as strong directional demand.
When few orders are available near the current price, an ordinary marketable order can cross several levels. Spreads may widen and individual trades may move the last price more sharply. The resulting candle can look dramatic even when no participant intended to create a dramatic chart pattern.
High activity does not guarantee easy execution
Completed activity is not the same measurement as available trading capacity.
Volume records completed trading. Liquidity describes the ability to transact in size with limited cost and price impact. An instrument can print high volume during stress while spreads widen and depth disappears. Another can show moderate volume but stable two-sided interest for the order size under consideration.
Decentralised liquidity changes what can be seen
A liquidity display is only as broad as the venues and providers feeding it.
Spot Forex liquidity is distributed across dealers, customers and electronic venues. A platform may display prices and depth from its own providers, but that view is not a universal order book containing every available currency order. Likewise, Forex activity fields should not automatically be interpreted as complete market-wide traded volume unless the data source establishes that meaning.
Candles omit the width and depth of the market
Use quote and order-book data for spread and depth questions; use candles for price-path questions.
OHLCV can show where completed prices travelled and, where valid, how much trading was recorded. It cannot reconstruct every bid, ask, spread, queue or cancelled order that existed inside the interval. A wick may be consistent with a temporary liquidity shortage, aggressive orders or several other mechanisms. The candle alone cannot choose between them.