What is the internal market?
The domestic market is the spread between the highest bid price and the lowest bid price among various market makers on a particular security, or their national best bid and offer (NBBO). Typically, price quotes among market makers are in lower demand and higher supply than quotes made to retail investors at the same value.
The supply of the internal market is called internal supply and the supply of the internal market is called supply or internal supply.
- The inside price is the highest bid and the lowest bid of a security. Historically, this was provided by a market maker, but in the age of e-commerce, it can also be created by other players.
- The interior price creates the spread between supply and demand. Bids below and questions above the internal price appear in the order book or in Level II.
- If an offer / offer is completely removed or completed, the next highest offer or the lowest offer becomes part of the domestic market price.
Understanding the domestic market
The domestic market, when it comes to market makers, has assumed a smaller role since the introduction of discount brokers and electronic exchanges. Market makers no longer play as active a role in most transactions that take place on a stock exchange, compared to before decimalization. Therefore, the domestic market is the highest offer and the lowest demand, regardless of who publishes those offers and offers.
Retail clients with direct access to the markets can place their own offers and orders, reducing the margin (if it is wider than $ 0.01 in a share), creating a new internal market. While a market maker can create an internal market, it does not always have to be the market marker that creates it.
An active day trader focusing on one stock could end up taking on the role of an unofficial market maker, buying and selling frequently, providing liquidity when others seek it, capturing the spread, benefiting from price movements, and creating frequently. the domestic market. .
Highly traded products such as currencies, top-tier stocks, and large exchange-traded funds (ETFs) will have small domestic markets due to high transaction volumes and large numbers of participants. In contrast, relatively unknown or small companies may have low volume and therefore a wide supply / demand margin and a domestic market.
As volatility increases, the domestic market will increase in all financial products due to uncertainty. This prevailed during the Great Recession, when investors looking to exit trades had to cross wide margins with significantly large domestic markets to execute those trades.
Spreads can also widen during the good news. A positive earnings report can send stocks skyrocketing, but because participants are looking to find the appropriate price after the announcement, market makers and active traders will want to be compensated for trading after the news. and therefore they will post lower bids and higher bids than they normally would. Under normal conditions, the stock can trade with a spread of $ 0.01, but after the news (good or bad), it can trade with a margin of $ 0.10 or $ 0.20, for example.
Offers, orders and external prices
Traders, investors and market makers post offers and requests at different prices. The highest supply and lowest demand make up the domestic market. There may be multiple traders at this price, for example, one market maker may bid 500 shares, while another trader has a bid of 200 and a longer-term investor has a bid of 100. The same concept applies to demand. .
If all shares in the offering are eliminated or completed, the offers at the next highest price will become part (the offering) of the domestic market.
The offers that are published below the highest offer and the offers that are published above the lowest offer are outside the internal price. These orders can be viewed in the order book or on the Level II screen.
Internal market example
Bank of America Corporation (BAC) is a highly traded stock, averaging more than 50 million shares per day. The spread is typically $ 0.01, and at each price level at or below the current bid, there will be multiple participants who will post their interest in buying at different volumes. The same goes for the offer. At the offer, and at each price above it, there will be offers to sell in different volumes.
Suppose the current bid is $ 27.90 and the current bid is $ 27.91. This is the domestic market.
The offering has 150,000 shares listed on multiple ECNs and on the New York Stock Exchange (NYSE) by multiple traders and market makers.
The offering has 225,000 shares listed on multiple ECNS and on the NYSE by multiple traders and market makers.
Traders, investors, and market makers can buy from those currently offered at $ 27.91, or they can add themselves to the queue of people who are bidding at $ 27.90. They can also choose to bid at a lower price of their choice.
Those who want to sell can sell or sell short by trading with people who bid at $ 27.90, or they can post an offer to sell at $ 27.91 or more.
Now suppose that all offers at $ 27.91 are completed. The next selling price is $ 27.92. Those who wanted to buy at $ 27.91 no longer have offers to buy, so they start bidding at $ 27.91. The domestic market has gone from $ 27.90 at $ 27.91 to $ 27.91 at $ 27.92. This process continues throughout the day causing the price to swing higher and higher.