What are inside quotes?
There is tight competition among market makers. Hence, they seek the best bid and ask price quotes when they buy or sell securities. We call these prices “inside quote.” If we look at the order book, we may not find all the quotes in the visible display. There is more to the inside quote. Suppose you can only look more in the inside of the inside quotes that are visible to retailers. Market makers will often talk about these inside quotes when they want to connect buyers and sellers through bid-ask trading. Aside from the market makers, wealthy people are usually the only ones who can see the inside quotes, but they also show in the price when the trade happens.
The best price for investors
The order book shows all the prices available for the investor. The NMS or regulation national market system does not allow practices that let the investor’s orders be filled with a price worse than the best in the order book.
Trading is not how it used to be
Trading has drastically changed in the modern world, where there are technological advancements. Today, retail investors can now access the market directly. The trading fees can be reasonable and not that expensive. So, if trading became what it is today, it means that the market maker’s duties would have been reduced. The time and sales print will usually match the bid and offer. The only exception would be ECNs and dark pools matching the orders with price movement. This can also be an inside quote even when a market maker did not trigger it. In fact, even retail traders can initiate these orders if they have advanced orders and ECN capabilities.
Let us cite an example.
Let us say that the bid and offer in the order book are at $100.10 and $100.20, respectively. You can buy shares at $100.20, but they can get filled at $100.15. Another person posted a hidden sell order at $100.15, which you ended up buying. You are not involved in the Regulation NMS because the order is not visible in the order book. Since the general public did not see it, there will only be a hit if a particular ECN or order type is used. As we mentioned, only market makers, sophisticated investors, and automated trading platforms are the only ones with access to these order types. It is a classic example of an inside quote.
Our additional thoughts on the inside quote
Inside quotes are prices that the public cannot see because they are inside the order book quotes, thus the given name. Let us say that the inside bid is more than the bid in the order book and the inside offer is less than the order book offer. There is usually no inside quote in most stocks. The best prices available are the order book quotes. But if there are really inside orders or dark orders, the execution price of these orders will be seen on the time and sales.