Bid and Ask Volume, Imbalances and Double-Counting

First up is Aline Henderson, who writes, "What, if anything, is the meaning of a stock's bid and ask sizes? When I pull up real-time quotes on my on-line broker's Web site, it always gives me those two numbers along with the current quote." Aline, to crudely paraphrase the Scottish economist Adam Smith, it all comes down to two forces: supply and demand. And for traders, the volume of a stock's bid and ask prices provide a third dimension that brings those abstract concepts to life.

Imagine a stock with a bid (current highest buying price) for 1,000 shares at 10 1/8, and an ask (current lowest selling price) for 5,000 shares at 10 3/8. There's more volume on the ask side than the bid side in this situation, effectively putting downward pressure on the stock price.

Here's how it works. If you put in a market order to buy 1,500 shares, your order would be filled at the ask of 10 3/8, leaving 3,500 more shares for sale at that price. But a market order to sell the same number of shares would actually knock the price of the stock down. A market order to sell 5,000 shares couldn't be filled at the bid, which is only for 1,000 shares. The remaining 500 shares would have to be filled at the next best bid, say at 10 1/16. In other words, the bid would "tick down." ...