Crossed Markets (Examples)

SUMMARY

A crossed market occurs when the bid price equals or exceeds the ask price in a financial market. This abnormal condition violates the fundamental principle that asks should always be higher than bids, potentially indicating market disruption or technological issues.

Understanding crossed markets

A crossed market represents an unusual and typically problematic market condition where the natural price hierarchy of bids and asks becomes inverted. In normal market conditions, the bid price should always be lower than the ask price, with the difference between them forming the bid-ask spread.

When markets become crossed, it creates confusion about the true market price and can lead to trading disruptions. For example, if the best bid is $10.05 and the best ask is$ 10.03, the market is crossed by $0.02.

Causes of crossed markets

Several factors can lead to crossed markets:

Technical issues

System latency or synchronization problems
Feed handler malfunctions
Market data processing delays

Market structure

Multiple trading venues with varying speeds
Complex order types interacting
Additional hold time (AHT) mismatches

Regulatory requirements

Trade-through protection rules
Different market access rules across venues
Locked market restrictions

Impact on market quality

Crossed markets can significantly affect market quality:

Prevention mechanisms

Modern markets employ several mechanisms to prevent or resolve crossed markets:

Trading system controls

Price validation checks
Circuit breakers
Smart Order Router (SOR) logic

Market structure rules

Order rejection policies
Auto-cancellation of crossing orders
Cancel on Disconnect (CoD) protocols

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