What is Bid Size?
When you’re looking at selling a stock, it’s important to look past the current market price, to the bid-ask spread. Specifically, you want to look at the current bid price and the accompanying bid size. These two factors will provide greater context into how much demand there is for a given stock at the current moment.
Bid price and bid size go hand-in-hand. The bid price is the highest price buyers are willing to pay for the stock, and the bid size represents the number of shares they’ll buy at that price. Both variables combine to represent market demand for a security, and it’s this demand that sellers want to look at if they’re looking to exit a position.
Here’s a closer look at bid size: what it means, how it changes and signals to keep an eye out for if you’re looking to capitalize on a favorable bid-ask spread.
How Bid Size Works
Traders who have access to Level I trading boards will see bid and ask prices listed with sizes. In the case of bid size, it might look something like this: $45.05 x 1,000. At face value, this means the highest price a buyer is willing to purchase 1,000 shares of the security for is $45.05. Some spread indicators may show this as $45.05 x 10, which means the same thing (10 represents the base multiple for 100 shares).
Traders with access to Level II trading boards will see differing bid-ask prices and sizes at varying levels. For example, the bid size on a company might be $45.05 x 3; $45.00 x 8; $44.92 x 12. These laddered prices represent the number of available shares at different price points. This is important for investors trading in bulk.
Bid Size Helps Create Depth of Market
The reason laddered bid-ask sizes are important is because they create depth of market. Here’s a look at how bid size affects someone looking to sell a significant number of shares:
Marissa holds 3,000 shares of ABC Company and wants to sell her entire position. She sees bid prices of $45.05 x 300, $45.00 x 800 and $44.92 x 1,200. She can sell her first 300 shares for $45.05, her next 800 shares at $45.00 and her remaining 900 shares at $44.92.
In this same example, the investor has the choice to sell fewer shares and retain some of their position. They’ll still receive a competitive bid no matter how many shares they sell; however, selling out of their entire position in one fell swoop could cause the share price to fall. Thus, they’re disincentivized by the depth of market. Instead, this investor might be wise to sell a portion of their shares, wait for the price to stabilize, then continue to sell down at optimal bid prices and sizes.
This market depth works both ways. Bid size might decrease as bid price increases, or bid price might decrease as bid size increases. It depends on the current levels of supply and demand for the given security. The search for equilibrium is what stabilizes stock prices—and swings in supply and demand are what cause them to rise or fall.
Representation of Demand
The bid side of any bid-ask spread is a clear representation of demand. When bid price is paired with bid size, it provides even more context for how bullish the market is on a given security.
Let’s say, for example, that the bid-ask spread of a stock is $45.50 – $45.52. This is a relatively tight spread, which indicates good liquidity. Now, say that the bid size is $45.50 x 1,500, while the ask price is $45.52 x 1,000. This tells us that there’s a high demand for the stock. The tight spread signals that buyers and sellers are in relative agreement on price, and the higher bid size means buyers are willing to transact in volume.
Take this in contrast to another stock with a spread of $45.50 – $45.52. Again, this is a tight spread and the stock likely has good liquidity. Now, say that the bid size is $45.50 x 800, while the ask price is $45.52 x 1,400. This would indicate lower demand for the stock. Even though buyers and sellers are in agreement on price, sellers are seeking to transact in volume. This is a bearish signal.
Using Limit Orders
When an investor puts in a limit order, it’s a signal to sell (or buy) once a security reaches a specified price. Investors seeking to capitalize on a specific bid price can use limit orders to make sure they transact at that bid price (or better), based on the number of shares available to trade.
For example, if you want to sell 3,000 shares at $45.50, but the bid size at that price is only 1,000, you can trim your holdings down to 2,000 and a “good until cancelled” limit order will re-trigger once additional shares become available at that bid price (or better). This, again, helps investors navigate the depth of market created by an ever-changing bid-ask spread.
Pay Close Attention to Bid Size
While many investors will glance at bid-ask spreads to get an idea of a stock’s liquidity, it’s also important to consider its bid size at each price level. This can provide great context for bullish or bearish sentiment, and give investors an idea of what kind of volume they can expect to unload if they decide to sell out of their position.