What is the Bid and Ask?
To understand what the spread is, you must first understand what the bid and ask price is.
Bid: The highest price that a buyer is willing to pay for a security.
Ask (Also Known as the "Offer"): The lowest price that a seller is willing to sell a security at.
A transaction occurs in the market when a buyer agrees to pay the best ask (offer) that is currently available, or the seller agrees to sell at the best bid that is currently available. The difference between these two prices (the spread) determines how liquid any given security is.
What is the Bid-Ask Spread?
The Bid-Ask spread refers to the difference between the bid and ask. The spread is the difference between the highest price that buyer is willing to pay for a security and the lowest price that a seller is willing to sell a security at. The bid-ask spread can be used as a measure of the supply and demand of a security, the further these bid-ask prices diverge the more the supply and demand of the security changes.
How can you use/see the Bid-Ask on the Quant Data dashboard?
Where the trade executed in the spread is appended to the size @ price column on the order flow table as a BB, B, M, A, or AA.
What do B, BB, M, A, and AA mean?
B means the trade executed at the bid price.
BB means the trade executed below the bid price.
M means the trade executed at the middle price between the bid-ask spread.
A means the trade executed at the ask price.
AA means the trade executed above the ask price.
How can we use this to determine whether the order flow has a bullish or bearish thesis?
In its simplest form, a call is a bet that the security will go up and a put is a bet that the security will go down. However, if an institution is closing a call position, that institution is getting rid of their call position most likely because they do not think that call will continue to go up. The same applies to puts, so how can we gauge whether the order flow is bullish or bearish if both calls and puts can be bullish or bearish?
We can use the price at which the trade executed in relation to the bid-ask price to make a prediction about what side of the trade the institution was on.
For example, a trade consisting of calls executed on the ask price (A) would hold a bullish thesis because we can predict that the trader is purchasing those calls.
This logic can also be applied to puts, if puts are executed on the ask price (A) it holds a bearish thesis because we can predict that the trader is purchasing those puts. Conversely, trades that execute on the bid side are the inverse as demonstrated in the table below (the table displays this concept for debit trades):
Bid or Below Bid (B, BB)
Purchased Calls (Bullish)
Sold Calls (Bearish)
Purchased Puts (Bearish)
Sold Puts (Bullish)
It is important to note that order flow that comes in below the bid (BB) or above the ask (AA) shows us urgency. It shows us that individuals are willing to pay more for the trade (AA) or sell the trade for less (BB) than what the market is asking for to have that trade executed quicker. Also, for trades that execute at the mid-price (M), we can not predict because we do not know whether this order was a purchase or sale.
Most other services just show you one side, it is important to look at both sides!
Just because there is a lot of order flow activity for call or puts, does not mean that activity holds a bullish or bearish thesis. The increase in activity could be the result of institutions looking to get out of their call or put positions.
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