A cross market occurs when the bid price of a security is higher than the ask price, which is unusual. This can happen due to high volatility and trading volume, or when a large number of orders are entered before the market opens. It can also be artificially created, but is generally considered unethical and illegal. Cross markets are unlikely to last long unless there are significant disruptions in the broader economy.
A cross market is a market situation in which the bid price associated with a specific security is higher than the ask price. This type of market event is generally considered to be contrary to normal market conditions, where the bid or ask price would be higher than the bid price. This type of situation is more likely to occur when the market in general is highly volatile and the volume of trading activity is significantly higher than usual.
While a cross market can conceivably develop as a result of unexpected events occurring during the trading day, such as an unusually large influx of electronic orders, there is a greater chance that this market situation will develop when an extremely large amount of orders is entered before the official opening of the market at the beginning of the day. When this occurs, the imbalance in the bid/ask spread may be apparent as the market opens. Unless unusual circumstances develop within the economy that continue to fuel this phenomenon, there is a good chance that the bid/ask price gap will continue to narrow during market open hours, ultimately restoring a more normal market.
It is also possible to artificially create a cross-market situation by deliberately posting bid prices that are not in line with the bid or ask prices. This type of activity is generally considered unethical in most markets and is actually illegal in others. The reason why this strategy is not looked upon favorably is that it allows a limited number of market makers to take advantage of the situation and possibly keep it going for a longer period of time as they make buys and sells which would not be possible in a normal market situation.
For the most part, a cross market isn’t likely to last for an extended period of time unless there are significant disruptions in the broader economy that directly impact specific securities traded in the market. These unforeseen events may include the sudden resignation of key players within a large publicly traded company, the occurrence of some sort of natural disaster, or even some events such as hostile takeovers of companies or the overthrow of a government. In most situations, the cross market will begin to stabilize within a short period of time, allowing the market to regain equilibrium and restore the bid/ask price ratio to a state that is considered normal rather than abnormal.
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