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A crossed 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 contrary to normal market conditions, in which the offer or ask price would be higher than the bid price. This type of situation is most likely to occur when the market in general is highly volatile and the volume of trading activity is significantly higher than usual.
While a crossed market can conceivably develop as the result of unanticipated events occurring during the trading day, such as an unusually high influx of electronic orders, there is an increased possibility of this market situation developing when an extremely high amount of orders are 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 at the market opening. Unless there are unusual circumstances developing within the economy that continue to feed this phenomenon, there is a good chance that the gap between the bid and ask price will continue to shrink during the opening hours of the market, ultimately restoring the a more normal market situation.
It is also possible to artificially create a crossed market situation by deliberately posting bid prices that are out of line with the asking or offer prices. This type of activity is generally considered unethical in most markets and is actually illegal in others. The reason that this strategy is not looked upon with favor is that it makes it possible for a limited number of market makers to take advantage of the situation and possibly continue to drive it to last for a longer period of time while they make purchases and sales that would not be possible in a normal market situation.
For the most part, a crossed market is not likely to last for an extended period of time unless there are significant upheavals in the wider economy that have a direct impact on specific securities being traded in the marketplace. Those unanticipated events may include the sudden resignation of key players within a major company traded in the marketplace, the occurrence of some sort of natural disaster, or even some events such as hostile takeovers of companies or the overthrow of a government. Under most situations, the crossed market will begin to stabilize within a short period of time, allowing the marketplace to regain equilibrium and restore the relationship between the bid and ask prices to a state that is considered normal rather than abnormal.