Lift the offer

What Is Lift the Offer?

"Lift the offer" is a term used in financial markets to describe the action of a buyer placing a market order to immediately purchase a security at the prevailing ask price, also known as the offer price. This action indicates that the buyer is willing to accept the lowest price at which a seller is currently willing to sell, thereby "lifting" the outstanding offer from the order book. This concept is fundamental to understanding trading orders within the broader category of financial markets. When a buyer lifts the offer, they are prioritizing immediate execution over price certainty, as a market order guarantees a fill but not a specific execution price.

History and Origin

The concept of "lifting the offer" has evolved alongside the development of organized stock exchange trading. In early markets, transactions occurred through direct negotiation between buyers and sellers, often in physical trading pits or coffeehouses. As markets formalized, the distinction between bid and ask prices became central to price discovery. The "offer" side of the market represented the lowest price at which a seller would part with a security.

With the advent of electronic trading systems, particularly with the rise of exchanges like Nasdaq in 1971 and the later transition of the NYSE to primarily electronic operations, the process became automated. The New York Stock Exchange, for instance, temporarily moved to fully electronic trading in March 2020, demonstrating the capabilities of modern systems to facilitate immediate executions.¹¹,¹⁰, In this digital environment, an order to "lift the offer" is executed by a system matching a buy market order with the lowest available sell limit order on the order book.

Key Takeaways

• "Lift the offer" refers to a buyer executing a market order to purchase a security at the current lowest ask price.
• This action prioritizes immediate trade execution over obtaining a specific price.
• It directly consumes liquidity available at the best offer price in the market.
• The term highlights the interaction between buyers and sellers, influencing the bid-ask spread.
• Understanding this action is crucial for participants in high-frequency trading and market maker roles.

Interpreting the Term

When a trader "lifts the offer," it signifies an immediate demand for a security at its current selling price. This action is distinct from placing a limit order to buy below the current ask price, which indicates a willingness to wait for a more favorable entry point. Interpreting the act of lifting the offer means recognizing that the buyer is accepting the liquidity provided by sellers at that specific price level. In a deep order book, repeated instances of buyers lifting the offer can signal strong buying pressure and potentially a rising price trend if the available supply is consumed quickly. Conversely, in a less liquid market, lifting a large offer could significantly move the price upward due to limited available shares at various price levels.

Hypothetical Example

Imagine Stock XYZ is trading on an exchange. The current bid is $50.00 (buyers are willing to pay $50.00), and the current ask, or offer, is $50.05 (sellers are willing to accept $50.05).

A trader, Sarah, wants to acquire 100 shares of Stock XYZ immediately. She believes the stock is about to rise and does not want to risk missing the opportunity by placing a limit order at a lower price.

1. Sarah places a market order to buy 100 shares of Stock XYZ.
2. Her broker's system routes this market order to the exchange.
3. The order immediately matches with the lowest available offer in the order book, which is 100 shares at $50.05.
4. Sarah's order is executed, and she "lifts the offer" by purchasing the shares at $50.05.
5. After her order is filled, the next lowest ask price in the order book might become $50.06 or higher, depending on the trading volume and depth of available offers at that price level.

This example illustrates how Sarah's action removed the $50.05 offer from the market by fulfilling it with her buy order.

Practical Applications

"Lift the offer" is a common action in various financial contexts, reflecting a direct interaction between supply and demand.

• Retail Investing: Individual investors often lift the offer when placing simple market buy orders through their brokerage platforms, prioritizing speed and certainty of execution for their trades.
• Day Trading and Algorithmic Trading: Traders who employ strategies requiring immediate entry into a position will frequently lift the offer. Algorithmic trading systems are programmed to automatically lift offers when specific market conditions or signals are met, ensuring rapid execution.
• Market Making: Market makers aim to profit from the bid-ask spread by simultaneously quoting both bid and ask prices. When a buyer lifts their offer, the market maker has successfully sold shares from their inventory, earning the spread. Regulatory bodies like the U.S. Securities and Exchange Commission (SEC) define market-making activities, including earning revenue from capturing bid-ask spreads by buying at the bid and selling at the offer.⁹,⁸
• Arbitrage: In situations where price discrepancies exist across different venues or related securities, an arbitrageur might lift an offer on one exchange while simultaneously hitting a bid on another to capture a risk-free profit.

Limitations and Criticisms

While lifting the offer ensures immediate execution, it comes with potential drawbacks, primarily concerning the final execution price.

• Price Uncertainty: When a market order is used to "lift the offer," the exact price at which the trade will be executed is not guaranteed until the order is filled. In fast-moving or volatile markets, the price may change significantly between the time the order is placed and the moment it is executed, leading to slippage.⁷,⁶ This means the investor might pay a higher price than the last quoted price or the price anticipated when placing the order.
• Market Impact: For large orders, repeatedly lifting the offer can "walk up" the price of a security by consuming all available offers at incrementally higher price levels. This can result in a less favorable average execution price for the buyer and a visible impact on the market.
• Wider Spreads: In illiquid securities or during periods of high market stress, the bid-ask spread can widen considerably.,⁵ When the spread is wide, lifting the offer means paying a substantial premium over the current bid, increasing transaction costs. For example, during times of market turmoil, such as the COVID-19-related market stress in March 2020, bid-ask spreads for various securities widened sharply, impacting transaction costs and market liquidity.⁴,³ The Federal Reserve Bank of New York also notes that while bid-ask spreads are a common measure of liquidity, they only measure the cost of executing a single trade of limited size, and the full quantity market makers are willing to transact may not be revealed.²,¹

Lift the Offer vs. Hit the Bid

The terms "lift the offer" and "hit the bid" describe opposite actions in market trading, both relating to immediate trade execution using market orders.

While "lift the offer" refers to a buyer taking the initiative to purchase at the seller's price, "hit the bid" describes a seller taking the initiative to sell at the buyer's price. Both actions are common when immediate execution is prioritized over achieving a specific limit price.

FAQs

Why would a trader choose to "lift the offer"?

A trader chooses to "lift the offer" primarily when immediate execution of a trade is the top priority. This is often the case when a trader believes the price of a security is about to move significantly in their favor and they want to ensure they get into or out of a position without delay, even if it means paying the current ask price. It’s common for traders who use market orders.

What is the difference between "lift the offer" and placing a buy limit order?

"Lift the offer" involves placing a market order to buy immediately at the best available seller's price (the ask). A buy limit order, by contrast, specifies a maximum price at which the buyer is willing to purchase. A limit order will only execute if the market price falls to or below that specified limit, offering price control but no guarantee of immediate execution.

Does "lift the offer" guarantee a specific price?

No, "lift the offer" does not guarantee a specific price. When you lift the offer, you are placing a market order, which instructs your broker to execute the trade at the best available price at that moment. In volatile markets or for less liquid securities, the actual execution price may be slightly different (higher) than the last quoted ask price due to slippage before the order is fully filled.

How does "lift the offer" affect the bid-ask spread?

When a buyer "lifts the offer," they are consuming the shares available at the lowest ask price. If enough shares are bought at that price level, the next available offer in the order book will be at a higher price. This action, especially with large orders, can cause the ask side of the bid-ask spread to move upwards, potentially widening the spread if the bid price doesn't adjust simultaneously.