What it is:
How it works (Example):
Let's assume you place an order to purchase 100 shares of Company XYZ stock at $50 per share. In this example, the bid size is 100 shares. Exchanges typically quote bid sizes in the hundreds, meaning that the exchange holding the order would actually quote Company XYZ's bid size as 1. If the bid size were 300 shares, the bid size would be 3.
If your trade is executed, and then the bid falls to $40 while the bid size increases to 1,000 shares, then one might infer that investors think XYZ Company is actually worth $40 per share or is in fact cheap at that price. This is one way bid sizes can indicate not only the direction but the strength or pressure of a stock's price trend.
The relationship between bid sizes and ask sizes can also indicate the strength and intensity of a trend. If bid sizes are considerably higher than ask sizes, this can suggest strong demand for the stock (and vice versa).
SEC and exchange rules govern the reporting of bid sizes, especially in situations that create considerable gaps between bid and ask prices.
Why it Matters:
The extent to which bid size is relevant differs with the exchange on which the stock trades. On the New York Stock Exchange and the American Stock Exchange, for example, the bid size is less indicative of investor enthusiasm about a certain stock price than it is on the Nasdaq. This is because the NYSE and AMEX use specialists to execute trades, and the Nasdaq uses market makers. It is also important to note that bid sizes do not always represent one buyer's offer. Exchanges and certain electronic trading networks may quote bid sizes that are combinations of more than one prospective buyer's bid.
One common trading strategy that incorporates bid sizes is to place a limit order to purchase a stock at the midpoint between its bid and ask price if bid sizes are much larger than ask sizes. (This assumes the stock's price is not falling rapidly.) If the stock is not advancing rapidly, another trading strategy is to short the stock at the midpoint between the ask and bid price if the bid size is smaller than the ask size.