A crossed market is a temporary situation in financial trading where the bid price of a security is higher than the ask price, typically caused by delays in updating quotes.
Mechanics of a crossed market
In standard market conditions, the ask price of an asset is always higher than the bid price. The bid price represents the maximum amount a buyer is willing to pay, while the ask price represents the minimum amount a seller is willing to accept. When the bid price rises above the ask price, the market is crossed. This pricing anomaly means a buyer is offering to pay more than a seller is demanding.
For Elephants monitoring international order books, these situations usually appear in fast-moving markets with high volatility. Crossed markets occur when an asset trades simultaneously on multiple exchanges or electronic communication networks. If one exchange experiences a fraction of a second of latency, its quotes fall behind the live market. This delay causes the outdated ask price on the slower exchange to overlap with the updated, higher bid price on the faster exchange.
A crossed market rarely lasts longer than a few milliseconds. Automated trading algorithms scan exchange data specifically to identify these pricing errors. When the algorithms detect a crossed market, they execute arbitrage trades to capture the price difference. The resulting volume of buy orders and sell orders absorbs the available liquidity. This activity quickly corrects the pricing discrepancy and returns the bid and ask prices to a normal spread.
Example
Imagine two different trading platforms where Elephants trade shares of an agricultural trust. On the Savannah Stock Exchange, an Elephant lists an ask price of 50.00 units for a share. Simultaneously, on the Jungle Electronic Network, another Elephant submits a bid price of 50.05 units for the exact same share. Because of a slight data delay between the two platforms, the bid of 50.05 crosses the ask of 50.00. An algorithmic trading program detects this crossed market, buys the share for 50.00 on the Savannah Stock Exchange, and instantly sells it for 50.05 on the Jungle Electronic Network to secure a profit of 0.05 units.