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In financial markets, an inside quote is the best available bid and ask, or offer, price for a stock or other financial security. Inside quotes are established by collecting bids and offers from market-makers or professional traders working for exchange member firms who are responsible for actively making bids and offers in a particular stock and then sorting them according to highest bid and lowest ask prices, as well as transaction size or other secondary data. Using an exchange's trading system, electronic trading networks or networks of inter-dealer brokers post the best prices at which they are willing to buy — their bid prices — or sell — their ask or offer prices. The difference between them is known as the bid-ask spread. As market conditions change and order flows vary, they may raise their bids, or lower their offers, in order to fill a particular order or increase their chances of attracting a seller or buyer respectively. If this is better than the highest bid and lowest offer currently available on the market, a new inside quote is established.
Large, liquid financial markets where there is active trading are fluid and dynamic, i.e. prices to buy or sell a particular asset change almost continuously based on the flow of orders from investors through brokers and dealers and on to exchanges. Market-makers update their individual best bid and offer prices throughout the trading day based on orders they receive from their investor and broker customers. Exchange trading and market data systems are built to determine and distribute the resulting inside quotes to market professionals, financial media, and the broader investing public, either in real-time or on a delayed basis.
On rare occasions, the bid and ask prices — the two sides of an inside quote — wind up being equal and trading grinds to a halt. Known as a locked market, this situation is usually remedied quickly by a market-maker updating the inside quote and reestablishing a bid-ask spread. Locked markets typically occur when particular stocks or entire markets are very active and volatile, such as when unexpected news of fundamental significance becomes widely known, or in markets where no auction market rules have been preestablished to handle such situations. An example of the latter is the National Association of Securities Dealer's Over-the-Counter (OTC) Bulletin Board, where individual broker-dealer firms, the market-makers, set the inside quotes for shares of individual companies.
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