The unit of sales/purchase is 100 shares. So 5x5 means 500 shares available for bid and 500 share available for ask. This is the minumumm of shares the market maker or specialist is willing to commit themselves to in each type of transaction.
Since my experience has been with NASDAQ, my comments that follow will refer to that market. As far as the specific numbers that are given, this depends alot on the marketmaker. The numbers do no relate to the number of people buying or selling. Also, the marketmaker is the middle man in each transaction. All shares on NASDAQ pass through them. So if I were to sell 100 shares which you end up purchasing, this would be recorded as two transactions. One transaction is recorded as shares sold to the marketmaker at the bid price, and the another transaction is noted as shares sold to you from the marketmaker at the ask price. Also keep in mind that the figures you see for the quote is a composite of all the available bid/ask quotes from the marketmakers of that stock. This means that the bid figures may come from one marketmaker, and the ask figures may come from a different marketmaker.
If there has been alot of selling by investors, then they can have a large number of shares on their books to sell. This marketmaker may then advertise this condition by increasing the number of units for sale on the ask quote. So instead of the usual quote the marketmaker uses for a particular stock such as 10x10, he may advertise the additional shares available for sale by making the quote 10x15 or 10x20. There are other marketmakers who choose figures for both the bid and ask that are actually representative of what they have available for sale and are willing to purchase at any given time.
Still, there are some marketmakers that keep their position more closely held. This is particularily true for a stock that is being thinly traded. This means that instead of advertising that they have a lot of shares available for sale, the may wait for the next opportunities the market will create for them to sell their surplus of shares. Or the marketmaker may make a telephone call and negotiate a sales directly with another marketmaker or large customer. If they see that they cannot unload their shares by waiting a period of time or by a direct sale, then they have two options. One opition is to then advertise the shares for sale by adjusting their quote as mentioned in the preceding paragraph. The other option, particularily if it is near the end of the day, is to close out their position with a net surplus of shares in hand and sell them at the start of the next day. However, many marketmakers make it a rule to close their position flat (no net ballance of shares at end of day).
If anyone has additional information or corrections they can make, please do. I have derived this information by following the actions of marketmakers on thinly traded stock and other resources. |
