Choosing An Exchange For Stock Prices

Andrew Carpenter
November 11, 2017

If you are looking for real time stock prices, its important to get some clarity about what a stock price even is. This article explains why there can be multiple prices for the same stock at the same time, how those prices converge, and provides a guide for deciding which stock price is the right price for different use cases.

Why isn't there just one stock price?

Stock prices are set by stock exchanges where stock owners put their stock up for sale and those that wish to buy stock place bids. The "ask price" is the most recent sale price offered by stock owners, and the "bid price" is the most recent offered price by stock buyers.

The difference between these numbers is called the spread. Stock exchanges match buyers and sellers - each time they do, a sale occurs. The price of that sale is generally between the bid and and ask prices and is called the "last sale." Each time a sale occurs, the price of the stock is set anew. This last sale represents the stock price on that exchange. The last sale is also called the "last price."

The reason there isn't a single stock price is that this process of matching buyers and sellers is happening on numerous exchanges for the same stock. A buyer and seller can be matched on the Nasdaq exchange, creating one last price, at the same time as another buyer and seller are matched for the same stock on the IEX exchange, creating a second last price. Meanwhile, BATS, NYSE, and other exchanges are also trading the stock, generating still more last prices.

This process means that, at any given moment, there are several "stock prices" for the same stock.

How do stock prices converge?

Stock prices tend to converge across exchanges because buyers and sellers of stocks can place their orders on any exchange. If the price of a stock is higher on one exchange, sellers will gravitate to it. That extra supply will lower the price. Similarly, buyers won't pay a premium if the price gets too high on one exchange, they will migrate to another exchange.

This process is less apparent to individual investors, but behind the scenes at bigger trading firms and market makers, there is a fiduciary responsibility to get the best deals for their clients. The result is that, while there are many stock prices on many exchanges and there are often different prices, over many trades, the prices tend to become very similar on different exchanges.

The degree of similarity between exchanges has a lot to do with trade volume. The higher the "liquidity" of a stock on an exchange, the less likely that stock is to have a large variance from other exchanges. In other words, the longer it takes for a buyer and seller to be matched, the more drift can occur between the most recent last sale price and the "stock price" on a different exchange.

There are services that "consolidate" last sales across exchanges to get a national stock price. This involves a national best bid-best offer (NBBO) and is referred to as the consolidated tape. It is common, however, for stock price consumers to use the "stock price" from a single stock exchange.

Deciding which stock price is the right price

Exchanges charge different amounts for data about the trades that they facilitate. These fees can be tiny, or even free in some cases, and thousands of dollars per month in others. The fees also vary depending on what you want to do with the data - for internal, individual end use, the fees are pretty reasonable. For redistribution access, the cost goes up.

Deciding which exchange to use is certainly influenced by cost, but it's also important to consider how much drift from the NBBO, or consolidated average trading price across exchanges, is acceptable. If 15-minute delayed prices, or prices that are slightly off from the last sale on larger exchanges are okay, then it's not necessary to shell out for "real time" prices or prices from an exchange that does higher volume. If you are day trading stocks, or need the most accurate price possible, use the consolidated tape or the stock price on a very liquid exchange.

Intrinio offers real time prices from more than a dozen exchanges and two of them will help to illustrate how stock price consumers should think about the different "stock prices" across exchanges.

The first exchange is Nasdaq. Nasdaq handles the largest volume of trades of any US exchange, meaning that the last sale price on NASDAQ is within 1% of the NBBO, consolidated stock price more than 99% of the time. This makes the Nasdaq real-time price highly useful for traders and app developers that need the stock price to be consistent with what traders are paying across the broad market. Nasdaq feeds are available with a 15-minute delay or in real time for institutions.

The second exchange is IEX, the Investors Exchange. About 2.5% of all trades occur on this exchange, significantly less than other exchanges. This means the stock price on this exchange can drift from the NBBO price or the price on more liquid exchanges like Nasdaq. Still, the last price on IEX tends to converge with the price on other exchanges and tens of millions of trades are placed each day. The IEX real time data feed is the most affordable option for enterprise redistribution. This is the ideal option for stock price consumers that are okay with a stock price that is slightly different from the price on other exchanges.

Before deciding on a last price, it's critical to think about how stock prices can vary, and to compare the cost for licensing that data across exchanges.

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