A thin bid, a fat ask, where is fair value?

Question

The top of book shows: bid 49.99 with only 200 shares resting, ask 50.00 with 800 shares. Is fair value the mid, 49.995? If not, where is it, and why?

Accepted Answer

The mid ignores the imbalance. The plain mid (49.99 + 50.00)/2 = 49.995 treats both sides equally, but the book is lopsided the other way from the classic example: only 200 shares bid versus 800 offered. The thin bid is the vulnerable side, more likely to be pulled or hit through, so fair value is skewed toward the bid (downward). The microprice. Weight each price by the size on the opposite side (the queue imbalance): P{	ext{micro}} = \frac{P{	ext{bid}}\,Q{	ext{ask}} + P{	ext{ask}}\,Q{	ext{bid}}}{Q{	ext{bid}} + Q{	ext{ask}}}. Plug in P{	ext{bid}} = 49.99,\ Q{	ext{bid}} = 200,\ P{	e…

A thin bid, a fat ask, where is fair value?

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