What it is:
How it works (Example):
Let's assume the shares of XYZ Company trade on the Nasdaq and there are four market makers for the stock. At the day and time you are considering placing an order to sell your XYZ Company stock, the market makers are bidding the following prices for the stock:
Market Maker A $45.25
Market Maker B $45.50
Market Maker C $45.00
In this example, market maker B, who is offering to buy the stock at $45.50 per share, has the best bid.
Now let's look at the bid prices for the four market makers of XYZ Company bonds:
Market Maker A 99.75
Market Maker B 99.50
Market Maker C 99.25
In this example, market maker A has the best bid because it is willing to buy the bond for 99.75% of its face value.
Note in both examples that we have ignored bid size; the investor should consider the number of securities sought by the market makers when evaluating prices. Also note that the current price of a security is the price at which it last changed hands; the best bid is the price at which a market maker is currently willing to buy. The SEC requires brokers to guarantee their customers the best available bid price.
Why it Matters:
The market maker presenting the best bid usually receives the next order. This is important to day traders and other investors who trade very quickly. Delaying a trade by just a few minutes can expose the investor to the risk of completing the trade at a less favorable price.
The best bid is a component of the inside spread, which is the difference between the best ask and the best bid. Some traders and analysts purchase access to services showing all bids and ask prices on a particular security. Not only can this provide clues about a security's price trends, it may also indicate which of the market makers has the most influence on a security's bid price.