Retail market buys hit the ask

A fill-side audit

Editorial note: treat every bid-ask walkthrough as a fill-side audit. First ask whether the instruction is a market order or a limit order. Then check which posted quote that choice actually takes.

The bid is the displayed price of resting buy interest, the side a marketable sell usually trades against. The ask is the displayed price of resting sell interest, the side a marketable buy usually trades against.

A market order is an unpriced instruction that seeks an immediate fill, typically lifting the posted ask on a buy and hitting the posted bid on a sell. A limit order is a priced instruction that need not take the far side of the displayed quote, so a buy can rest below the ask and a sell can rest above the bid.

The original pairing

A published execution explainer asserted that a trader always buys at the bid and sells at the ask. A later reader treated that pairing as incorrect for ordinary marketable orders.

The reader argued that, unless a limit order is used, a buy instruction is filled at the ask and a sell instruction is filled at the bid. The same letter treated the limit order as the exception that can avoid automatically taking the far side of the two-sided quote.

Quote coherence and the spread

The letter flagged a worked currency example in which the quoted bid sat above the quoted ask as inconsistent with a coherent two-sided quote.

The letter rejected the idea that a broker automatically keeps the bid-ask spread on a customer trade, arguing the spread is retained only if the broker can offset the customer by trading against the opposite quote. The spread is the gap between bid and ask. Capturing it is not automatic on a customer fill. It depends on whether the intermediary can offset that fill on the opposite quote.

The accepted correction

The publication's editor accepted the correction, stating that a retail buyer transacts on the ask and that bid and ask had been interchanged in the original piece.