gregn

Thank you everyone, much appreciated. Hey Blowfish -- do you still trade using Jerry's MP techniques?

Basically, my question is who sets the bid/ask prices that you see in DOMs? Clearly, there are bids and asks that are higher/lower than these set prices. What sets the current bid/ask?

I forgot to take into account the difference of shorting a stock vs shorting a future. When a stock is shorted, you borrow the stock from another source and sell it. When a future is shorted, a new contract is written by the 'seller', which allows for a variable 'open interest'. Again though, the new contract has to have its price 'set', correct? It does not start at $0 and is bid up to 1200 (if we are talking about /es).

Jason, awesome post - I thanked you for that. That explains the bid/ask process, but how is the actual 'price' determined? For instance, when would that guy sitting at 10.04 with a limit order to sell 2200 units get his fill? If a buyer were to place a limit order at 10.04, the transaction would not occur because the 'bid' price is not at that level. Doesn't the 'market maker' lift the bid/ask prices which executes the limit orders? Thank you again.

That'a a bit of a catch 22 isn't it? How can someone open without someone else closing?

Kiwi, I am not trying to be an jerk, however this still does not make sense to me. The 'idea' of it does, but not the actual mechanics of it. Let's go with this : OK, let's say price is $100. After the first 1/1 sale, 7 'motivated' buyers step up. The first 'motivated' buyer buys 1 unit at $100 (let's assume there is no spread) and the 'nonmotivated' seller sells 1 unit at $100. '[E]ach time the next sellers drop back' I will take that to mean that they are waiting for higher prices before they sell. Well now the 6 other 'motivated' buyers are SOL because no one is willing to sell them any units at the current price, correct? Here's my theory -- there needs to be a market maker to move the price. The price will not move on its own to match the 'perception' of the participants -- it just cannot happen that way. There needs to be a mechanism, either automated or human to move the price based on the input. Again, I really appreciate everyone's input. I asked this before, but no one responded: does anyone know what trading platforms show the order conditions 'market', 'limit' etc in the times and sales window?

First off, I appreciate everyone's feedback. In reference to Blowfish's From Investopedia: This is a breakdown of how open interest can be calculated: "-On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1. -On January 2, C and D create trading volume of 5 and there are also five more options left open. -On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1. -On January 4, E simply replaces C and open interest does not change, trading volume increases by 5." This does not make any sense either, really. Why would the activity on January 4 be any different than the activity on January 1? A buying 1 option(/future) from B, yet this creates 1 open volume unit. However, it is stated that on the 4th of January 'E simply replaces C and open interest does not change'. Why is it that on January 1st it is not true that A 'simply replaces' B, thus leaving the open volume unchanged?

I had been under the impression that they buying to selling ratio was not always 1:1 until someone mentioned that the market makers has to sell to buyers if there are no real sellers.

This would be like Amazon basing the pricing for it's products on the type of shipping put on the items. For instance, books that had overnight shipping should increase in price and those that have strictly ground shipping should be reduced in price, regardless of the supply:demand ratio.

Of course, however, the store scenario does not work with what I am being told about the market as it is not the relationship between supply and demand that creates the price since there is a buyer for every seller and inventory is not limited -- price is moved by the type of orders.

Also, why does T&S not show both ends of the transactions?

Thank you very much for this. I was thinking about market/limit orders while writing this, but I still do not know what mechanism moves the price due to 'aggressiveness'. There has to be a mechanism that quantifies this imbalance and moves the price accordingly since the actual 'buying' effect is met with a 'sell'. I apologize for the seemingly circular arguing, I am just having a hard time understanding this for some reason. I understand bid/ask market/limit just fine, I just want to know how/who determines how this affects price. Additionally, what platforms show order execution conditions? I use ToS for charting and X_Trader on TT for execution and I do not think that either show if bids are being hit on sells etc.

How exactly can motivation be quantified other than with size? I still do not understand how price would move anywhere as the 1:1 buying to selling ratio would cancel out movements. Let's say the price is $100 and offer to sell 10 contracts at $100 -- my order will not be filled unless someone else wants to buy those 10 contracts. So let's get back to the motivation -- say I am really bullish on this future and I am willing to pay $105, but the price is at $100. Someone would have to want to sell at $105, which would cancel out the 'motivation' for a higher move. Even if the 'motivation' at the higher price were not cancelled out, I still do not understand why the price would move higher. To put this in more simple terms: let's say that there is a store that sells peanut butter. The price is $5. The store owner is the seller, the customer is the buyer. For the sake of simplicity, let's assume that the owner has infinite amounts with no need of a supplier. Between 100 customers, 500 tubs of peanut butter are purchased. Without the owner's intervention, there is no reason that the price would move because the supply:demand ratio is static. The owner is not running out of supply and his demand is met with supply each and every time. The store owner would have to 'mark up' the price of peanut butter for the price to actually change. Additionally, if this were the case, why would the times and sales show sell/buy orders at particular prices? If this were the case, there would have to be a buy and a sell for every order that you see.. why not for times and sales just have 'transactions', which would not be a buy or a sell? Thanks for the reply, Kiwi.

Can someone explain to me why/how there is a buyer for every seller? I understand the simple concept, I just do not understand why the price moves if there is a 1:1 correlation between buyers and sellers. Do the market makers have complete control over the price movement and just move the price around to facilitate the most trading? Thanks in advance.