Bid Whacker
Categories: Trading, Regulations, Stocks, Bonds
Someone who sells a stock at or below its bid price. The goal of the maneuver is to drive down bid prices.
Generally, as a seller, you are trying to get prices as high as possible. Therefore, under normal circumstances, bid whacking is considered something of a bonkers move...annoying to other sellers, and self-defeating in terms of getting yourself the most value out of the transaction.
Remember, the stereotypical negotiation goes something like this:
"I'll give you $X."
"I won't take any less than $Y."
"Fine, how about we split the difference? I'll give you an amount halfway between $X and $Y."
In a bid-whacking scenario, the negotiation goes something closer to this:
"I'll give you $X"
"Done! Unless I can talk you into paying less than $X..."
It may sound like bid whackers are conspiracy-theory bogey men purposely driving down stock prices for some nefarious purpose. Or, alternatively, that they are just nervous, inept traders who don't know what they are doing. (Or maybe that they are patently insane).
In realty, bid whacking most often comes up in more extreme market conditions, especially where a stock is falling quickly. These situations force sellers to try to get out of their positions with as little damage as possible. The sellers are jumping on bids, taking what they can get, out of fear that the offers will keep getting worse if they wait for the normal bid/ask dance to provide them with a more nominally efficient price.
Related or Semi-related Video
Finance: What is Spread?48 Views
finance a la shmoop. what is spread? before we start just no. get your mind
out of the gutter. spread refers to the money value between [100 dollar bill]
a bid and ask price under a market maker structure of trading securities. no more
wire hangers, a plastic hanger company is publicly traded on an exchange like
Nasdaq where buyers bid for a price to purchase and sellers ask for a price to [Nasdaq wall shown]
trade. no more wire hangers is bid this moment at 37:23 a share by buyers
willing to buy right now at that price and is being asked at this moment at a
price of 37.31. note the eight cents a shared difference in the share prices.
that dif is the spread between the two prices, and it's worth noting that in [bread is buttered]
extremely volatile stocks, the spread widens. and in boring highly liquid
stocks which don't move much, the spread tightens or is narrower. that is on a
volatile equivalent of no more wire hangers the spread might grow to 20 or
30 cents a share whereas a boring name that pays a big dividend and the stock
never moves much we're thinking AT&T here, [man snores at a desk]
well that spread might be just three or four cents. so why grow? well because a
market maker in a volatile stock doesn't want to be caught losing money on her
inventory. if no more wire hangers suddenly gapped down to 37.10 a share [equation shown]
well it would be likely less than the average of what the market maker paid
for her quote "inventory" unquote in that stock from which he was making a market
in it. each time the shares trade the market makers dip into that spread to [woman dips cracker in butter]
pay their bills and allow them to keep doing business. so that's spread. and it's
not the type that Prince used to sing about. [man on stage]