A second-hand phone stall

A market is just people saying what they would pay and what they would accept. The bid is the best price any buyer is offering right now. The ask is the best price any seller will accept right now. If you want to trade immediately, you take what is on offer: you buy at the ask, or you sell at the bid. The ask is always above the bid, and the gap between them is the spread.

Words you need

Bid and ask: The bid is the highest price a buyer is offering right now; the ask (also called the offer) is the lowest price a seller will take. To sell immediately you sell at the bid; to buy immediately you buy at the ask.e.g. A market '99 at 101': bid 99, ask 101.
Spread: Ask minus bid: the gap between the two prices.e.g. 99 at 101 has a spread of 2.
Mid: Halfway between bid and ask. Usually used as the fair mark of a position.e.g. 99 at 101 has mid 100.
Quote (making a market): Stating a bid and an ask together, as 'bid at ask'. You promise to buy at the bid and sell at the ask.e.g. '99 at 101' means I buy at 99 and sell at 101.
Market maker: A trader who keeps quoting both a bid and an ask and earns the spread when others trade with them.
Long and short: Long: you own it and gain if the price rises. Short: you sold it without owning it and gain if the price falls.

Why it works

Buyers want to pay little and sellers want to receive a lot, so the best buyer's price sits below the best seller's price. Trading immediately means accepting the other side's price, which is why buying costs more than selling earns at the same moment.

spread = ask − bid, mid = (bid + ask) / 2

Spot it: Any lesson or interview question that mentions a bid, an ask, a spread, a quote or a fill.

Technique reference and sources

A stall buys used phones for 99 and sells them for 101. If you want to sell your phone to the stall right now, you get 99: that is the stall's bid. If you want to buy one right now, you pay 101: that is the stall's ask. The stall is a market maker: it quotes '99 at 101' and earns the 2 dollar gap every time one person sells to it and another buys from it.

When this method fits

Any lesson or interview question that mentions a bid, an ask, a spread, a quote or a fill.
Working out what you pay or receive if you trade right now.
Working out what a market maker earns from a buyer and a seller.

Read the quote. '99 at 101' always means bid 99, ask 101. The lower number is the bid.
Pick your side. Buying now: you pay the ask (101). Selling now: you receive the bid (99).
Find the spread and the mid. Spread = 101 − 99 = 2. Mid = (99 + 101) / 2 = 100, the fair middle used to value what you hold.
Track your position. Buying makes you long (you own it, you gain if the price rises). Selling something you do not own makes you short (you gain if it falls).

Quote language: Traders say 'bid at ask'. 'I'm 99 at 101' means I will buy at 99 and sell at 101. A 'fill' means someone actually traded with your price.

'99 at 101': bid 99, ask 101, spread 2, mid 100
'My bid got filled': someone sold to me at my bid

Crossing the spread: Trading immediately costs half the spread against the mid, each way. Buy at 101 when the mid is 100 and you are already down 1 on paper.

Buy at 101, mid 100: −1 on paper
Sell at 99, mid 100: −1 on paper

Common traps

Thinking you can buy at the bid. The bid is what buyers pay, so it is where YOU sell. To buy right now you pay the ask.

Reading '99 at 101' as ask first. The bid is always said first and is always the lower number.

Calling the mid the price you trade at. The mid is a valuation. Trading now happens at the bid or the ask, half a spread away from the mid.

Thinking a short position needs the price to rise. Short means you sold first. You profit when you buy back cheaper, so you want the price to fall.

Another example: You sell 2 shares at 50 that you do not own, then later buy them back at 46. What is your profit?

You receive 2 × 50 = 100 when you sell.
Buying back costs 2 × 46 = 92.
100 − 92 = 8. Short positions gain when the price falls.

Source notes

These explanations and questions are written for QuantArc. Links show the underlying mathematics and learning design.

tradermath.org market games
Listing page checked: browser games including market making on dice, a card market-taking game, Fermi estimation and a trading game. Practice companion only; game content was not played or reviewed against these lessons. Lesson examples are original.

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