I have a very basic question regarding the histogram in Figure 2.2 (left). Here we have, typically, buy orders at higher prices than sell orders. To my naive eyes, it’s as if buy and sell were switched. The same goes for Figure 2.2 (right), I don’t understand why the blue buy orders are higher than the red sell orders. Also, I don’t get why so many orders “linger” and appear as horizontal bars - why don’t they get filled?
I’m a beginner here - thankful for any insights
In general, you have the cross the spread to execute your orders. There are bid and offers in the market. If you are wanting the orders to be executed right away, you need to have a willing seller (offer) who’s prices then to be higher for you to BUY. If you want to SELL, there needs to be a willing buyer and their prices tend to be lower (than the willing seller).
I have also noticed that orders do not get filled right away sometimes (very infrequent). I am still investigating this but I have not found a convincing answer for myself yet. My work around now is to avoid that period when I am backtesting.
Hi, thanks for the reply!
“If you want to SELL, there needs to be a willing buyer and their prices tend to be lower (than the willing seller).”
Exactly! So why are we seeing the opposite in Figure 2.2? In the Figure, the buyers’ prices tend to be HIGHER than the sellers.
Dear Paul ,
Another way of saying this is that the Buyer and Seller crosses the spreader to get immediate execution from bid-ask prices that are generally offered by market makers. Therefore, the Buy prices will tend to be higher than the Sell prices.
Bid prices (available prices to buy from Sellers) and ask ( available prices to sell to Buyers). I hope this clarifies it for you.