What is Hit the Bid?
The phrase “hit the bid” is a colloquial expression commonly used in investments to describe a scenario where a trader sells a financial instrument at the bid price quoted by a potential buyer (also a trader). When the scenario happens, it typically means accepting an offer that is considered fair relative to market conditions. The party that is buying the asset is called the bidder.
In simpler terms, hitting the bid means selling a financial asset or security at its respective bid price. A market maker or broker is generally in control of the “bid-ask” or “bid-offer,” and they charge a bid-offer spread based commission.
A bid strategy is generally used to lock in a price for an asset that is being sold. For a trader or investor to formulate and maintain a successful and reliable bid strategy, the bid-hit ratio needs to be monitored. The bid-hit ratio is an indicator of success for a bidding strategy and process. It allows traders to be mindful of movements in the ratio and predict potentially successful bids in the future.
How Hit the Bid Works
To hit the bid is to sell a security to another party at its bid price. This price represents the highest price among competing offers for the security.
A trader will hit the bid if they think it is an attractive price, or if they must sell quickly. To hit the bid, the most effective method is to enter a market order to sell, although a sell limit order set at the current bid price is also possible to avoid selling lower than the prevailing bid.
In addition to the price that an investor is willing to buy, the amount or volume bid is also important for understanding the liquidity of a market. Bid sizes are typically displayed along with a level 1 quote. If the quote indicates a bid price of $50 and a bid size of 500, you can sell up to 500 shares at $50.
If the best bid is for 100 shares and you have 500 to sell, hitting the bid with a market order will fill the first 100 shares at that price, but the additional 400 shares will be sold at progressively lower prices until the order is filled.
Example of a “Hit the Bid”
An investor is willing to sell an asset at $85 per share. He/she alerts a broker of the intention. The broker will make the price public and identify bids from other brokers.
In case no buyer is willing to pay $85 per share, but a buyer who is willing to pay $83 per share presents him/herself, the broker will contact the seller. If the bid is reasonable to the seller (investor), the broker will “hit the bid” (i.e., accept the offer) and organize the deal with the buying broker.