Inside Market

When you want to buy a stock, you log into an online brokerage account and purchase the shares at their current market price. You don't think much about where that price comes from, but there's a whole process going on below the surface to end at that seemingly simple dollar amount.

Publicly traded financial instruments (like stocks) get priced using a system not unlike an auction. There's a bid ("hey, I'd like to buy 100 shares at $22.36") and an ask ("I'll sell 60 shares at $22.38"). In-between, there's the market maker. These professionals act like auctioneers, matching the bids and asks to set the market price for the security.

To keep liquidity, these market makers sometimes trade with each other. If there aren't enough bids or asks, the market maker may turn to another market maker to get everything to match up. This process defines the inside market. It's the behind-the-scenes moves that keep the market humming.

Highly liquid assets (like big-name stocks) usually don't require much of an inside market. There's enough interest on both the buy and sell sides to keep things going.

However, trade in some commodities and other less liquid situations might require much more inside action to keep the market stable.