Buyer for Every Seller?

[gregn 10]

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.

[Kiwi 16]

First, there do not have to be any market makers involved.

 

Price moves because there is a combination of quantity and motivation that is stronger in one direction than another. So, say, the next buyer is more motivated than the next seller (and there is enough volume) then price will move up as buyers willingly pay what the seller asks and the sellers are able to pull back a little rather than having to advance to get filled.

 

Moves with increasing volume are classic trend moves with (say) sellers selling strongly even as buyers advance and soak up all of the supply.

 

But often there will be very little supply as sellers retreat or pull their orders and the buyers move up with little volume - until they reach the point where they start to wonder if price has gone to far. Etc etc.

 

But in every case there is a transaction with 1 buy for one sell. If all the sellers disappear then ...

[gregn 10]

Price moves because there is a combination of quantity and motivation that is stronger in one direction than another. So, say, the next buyer is more motivated than the next seller (and there is enough volume) then price will move up as buyers willingly pay what the seller asks and the sellers are able to pull back a little rather than having to advance to get filled.

 

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.

 

But in every case there is a transaction with 1 buy for one sell. If all the sellers disappear then ...

 

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.

Edited November 17, 2010 by gregn

[KeyToTheCastle 10]

How exactly can motivation be quantified other than with size?

Please forgive my intrusion but I can't resist a discussion on supply & demand.

 

Think of motivation in terms of aggressiveness. The buyer who is buying at the ask price is a more aggressive participant then the seller who is selling at the ask. The buyer is more motivated to get filled....he is getting in with a market order. As the buyers continue to be aggressive they will eat through the unaggressive sellers at the ask.

 

If aggressive sellers come in and start to sell at the bid then the market is in temporary balance with buyers and sellers cancelling each other out.

 

But if there are more aggressive buyers then aggressive sellers, and all the passive sellers who were selling at the ask get taken out then the offer will lift and price will move up.

 

The only thing that causes price to move is an imbalance between buyers and sellers, plain and simple.

[gregn 10]

The buyer who is buying at the ask price is a more aggressive participant then the seller who is selling at the ask. The buyer is more motivated to get filled....he is getting in with a market order. .

 

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.

[gregn 10]

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

[KeyToTheCastle 10]

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.

 

 

Actually the store owner could also mark down the price. What if his customers aren't crazy about his peanut butter and he finds himself with a load of inventory that he needs to sell before the peanut butter expires....then he might be forced to have a sale and lower his price just to move the inventory. Walmart does it all the time....

[gregn 10]

Actually the store owner could also mark down the price. What if his customers aren't crazy about his peanut butter and he finds himself with a load of inventory that he needs to sell before the peanut butter expires....then he might be forced to have a sale and lower his price just to move the inventory. Walmart does it all the time....

 

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.

[gregn 10]

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.

 

 

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.

[Kiwi 16]

OK. Simplify what I said. Build models in your mind.

 

You have a market of 10 sellers and 10 buyers. Each has only 1 contract. The starting price is $10 but 8 of the buyers suspect price is likely to move up to $15 very soon so if they're going to participate they need to buy now. They are motivated. 2 of the buyers are ambiguous about what might happen and think that current price represents value.

 

All the sellers but one are ambiguous and wonder if price is going to move down or up so are thinking about selling but are in no hurry.

 

Bring them together. The one ultramotivated seller rushes in and hits the first buyer. 1 for 1 and price stayed still. Then the other sellers hang back. As the next 7 motivated buyers rush up the sellers sell 1 at a time or 2 at a time and each time the next sellers drop back. With each 1 for 1 buy/sell the price moves up. Finally all of the motivated buyers have bought and all but 2 of the sellers have sold. And price has moved up.

 

What happens now? 8 buys. 8 sells. Price moved up. 2 more buyers exist, a bit annoyed that they were not motivated at the beginning but not at all motivated now so they just hold on. As do the last two sellers.

 

Until perceptions of current prices value change (and thus motivation) or new buyers and sellers with different opinions arrive.

 

 

You now have everything you need to know in my posts and gregns. If it doesn't make sense then why not go and read the auction market theory and wyckoff stuff. In the end you will have learned something and it will make sense to you.

[Tams 20]

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.

 

for consummated trades, there is a buyer for every seller.

 

during the bidding and asking process, they are never balanced.

[gregn 10]

for consummated trades, there is a buyer for every seller.

 

during the bidding and asking process, they are never balanced.

 

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.

[Gabe2004 10]

there is a buyer for every seller.

 

during the bidding and asking process, they are never balanced.

 

I disagree that there is a seller for every buyer.

What if 10 people have 1 share each and 1 person has 10 shares?

 

The number of sellers and buyers is immaterial.

How else would you explain the fact that sometimes the market turns on a low volume and sometimes on high volume?

or that market advances or retreates on higher or lower volume or the other way around?

I think that the market moves because of the willingness of people or lack thereof to pay a certain price or to accept a certain price.

As price moves in a certain direction a sense of urgency is developing. Either to buy at a higher price or to accept a lower price to get out of a position.

 

 

Gabe

[Kiwi 16]

It is pressure + power.

 

Power is something like the size of the buyer.

 

 

And Pressure is a combination of motivation + time pressure. In the sense that a large buyer who is highly motivated (they are going to buy their parcel) may still decide to spend days acquiring a position so they are not in a hurry and may in fact sell against themselves to try to avoid paying too high a price.

 

 

Tams is correct that there do not have to be an equal number of buyers and sellers .... available at any one time. There will be an equal number of buy units + sell units for the number of contracts/shares/widgets actually traded but there may be unsatisified buyers or sellers sitting on the sidelines ... either because the number is unbalanced CURRENTLY or because one or both parties are unconvinced that current pricing represents value.

 

The language really isn't precise enough in these conversations but I would recommend the op use true markets as their analogy for trading rather than shop keepers and other distorted markets. Line up sellers and buyers with xx units of stock and then work through scenarios of how they act and thus how price changes.

 

This points to the value added to markets by day traders ... without "honest participants" how would people get filled and the value/price equation get tested. Think about the thin markets you've traded ... palladium, lumber etc.

[Nick1984 10]

Easiest way to think about the price movements is based on auctions.

 

I dont hold stock and you hold some.

I want to buy and you want to sell.

I think that price is too high though and will not bid.

You want to sell but see that I'm not there to buy.

 

You lower your price to a point where I am willing to buy.

 

The reverse applies.

 

Also the ratio does not have to be 1:1. Look at any shre registry. There are always people who have accumulated more stock than others (i.e. Top 20 holders). They can sell their holdings to more people in smaller parcels thereby creating a larger spread.

 

The price each of those parcels is acquired by the new holders is determined by the auction process outlined above.

 

Simple.

[SIUYA 11]

Until perceptions of current prices value change (and thus motivation) or new buyers and sellers with different opinions arrive.

.

 

thats all you need.

[BlowFish 10]

It might be worth noting that the adage holds true for most markets. 'Zero sum' is an expression that often crops up around the same time. Take equities for example, if you want to sell you need a buyer however if you want to sell short you need to find someone that will loan you the stock. Stocks also have 'floats' that further restrict things (there may be willing buyers and willing sellers that can not trade with each other) You might want to google 'open interest' too

[gregn 10]

First off, I appreciate everyone's feedback.

 

In reference to Blowfish's

 

You might want to google 'open interest' too

 

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?

Edited November 19, 2010 by gregn

[GARYTL 10]

Hi

 

doesn't the market maker concept complicate this ?

 

i was under the impression that they create a market for a stock

by having to be the counterparty to a sell or buy so they would have

to have some reserve of stock ?

 

mind you they are still balancing up in that way i guess

 

is my idea of a market maker correct as i have never fully understood it

 

but if they are a MM for BP say they will "always" have to accept a sale

even if no one actually wanted to but them at that time

 

not knocking BP but in the middle of the gulf incident if i wanted to sell some BP and

no real investor wanted them , would the MM buy to keep pa fluid market open ?

 

any pointers on this appreciated

 

thanks

[gregn 10]

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 :

All the sellers but one are ambiguous and wonder if price is going to move down or up so are thinking about selling but are in no hurry.

 

Bring them together. The one ultramotivated seller rushes in and hits the first buyer. 1 for 1 and price stayed still. Then the other sellers hang back. As the next 7 motivated buyers rush up the sellers sell 1 at a time or 2 at a time and each time the next sellers drop back. With each 1 for 1 buy/sell the price moves up. Finally all of the motivated buyers have bought and all but 2 of the sellers have sold. And price has moved up.

 

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?

[BlowFish 10]

Re OI, when one party is opening and one party closing OI remains the same. C is simply transferring their holding to E.

 

On the other issue, I guess it depends what you mean by 'market maker'. If I place a limit order to sell 100 ES @ 1200, I am essentially 'making a market' at that price. If I simply place a market order to sell I am taking liquidity from someone 'making a market', that could be Kiwi sitting with his limit buy order at 1199.75.

[gregn 10]

Re OI, when one party is opening and one party closing OI remains the same. C is simply transferring their holding to E.

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

[sappjason 10]

I'm going to attempt to explain the actual mechanics of how an instrument increases/decreases in price, so bear with me, this may get confusing. Also, I'm not going to consider hidden orders in this example at all, but they most certainly exist (at least in equities markets). So, for this simple example, we have a fictitious stock with a symbol of ABC and the current order book looks like this:

 

A $10.04 x 2200

A $10.03 x 400

A $10.02 x 700

A $10.01 x 500

B $10.00 x 300

B $ 9.99 x 200

B $ 9.98 x 1100

B $ 9.97 x 1600

 

With the above order book, a buyer (for whatever reason) decides to enter into this market a new... He looks quickly at the order book and decides that he likes the current closest ASK price of $10.01 for his 400 shares that he wants to buy and as such, he uses a market order to by 400 shares. The order book now changes to this:

 

 

A $10.04 x 2200

A $10.03 x 400

A $10.02 x 700

A $10.01 x 100 400 shares were bought by our new buyer from this seller at $10.01

B $10.00 x 300

B $ 9.99 x 200

B $ 9.98 x 1100

B $ 9.97 x 1600

 

Now, a new buyer comes into the market and he sees that there are only 100 shares being offered for sale at $10.01, but he needs to buy 2000 shares, so what he does is use a limit order to buy 2000 shares at $10.02. The order book would change as follows:

 

A $10.04 x 2200

A $10.03 x 400

B $10.02 x 1200 The 100 shares at $10.01 were "taken out" by this order, along with the 700 shares at $10.02. The remaining 1200 shares this guy wants to purchase stay in the order book at his limit price of $10.02

B $10.00 x 300

B $ 9.99 x 200

B $ 9.98 x 1100

B $ 9.97 x 1600

 

What happened above? The new buyer just took out the 100 shares that were being offered at $10.01 and took out the other 700 shares that were being offered at $10.02. But because he used a limit order to BUY, the rest of his unexecuted 1200 shares now sit as the current new bid at $10.02. Notice that we left a tiny price point in the book empty ($10.01). This leaves some room for our next buyer who decides that he has 500 shares that he'd (or she) would like to buy, but the current best offer of $10.03 is just a tiny bit too high for him, so he decides to enter a limit order to buy his 500 shares at $10.01. The book changes to this:

 

 

A $10.04 x 2200

A $10.03 x 400

B $10.02 x 1200

B $10.01 x 500 This guy's 500 shares are added to the book at his limit price of $10.01

B $10.00 x 300

B $ 9.99 x 200

B $ 9.98 x 1100

B $ 9.97 x 1600

 

Now, just for one more interesting scenario, we have a seller that starts to get anxious. The guy sitting at $10.04 with 2200 decides to say "screw it" and simply sells all of 2200 shares "at market". The order book now looks like this:

 

A $10.03 x 400

B $ 9.98 x 1100

B $ 9.97 x 1600

 

So, basically, he just took out the $10.02, $10.01, $10.00 and $9.99 bids and left a wide hole in the current best bid/ask. This leaves room for additional buyers and sellers to enter this rather widened market and offer better bids/asks, to hopefully make a better market for new buyers/sellers.

 

Does that make sense as to how markets actually move? This happens all day on thousands of instruments with varying degrees of buyers/sellers with tons and tons of money. This is how prices actually move. In this sense, when you really take a close look at how prices work, you will notice that it becomes less obvious as to what the price of a certain equity actually is... Price becomes a very interesting thing and can be influenced greatly by those with deep, deep pockets.....

Edited November 19, 2010 by sappjason

[ScottB 10]

Just think about it all in terms of housing prices. Even the cost of raw materials corresponds to the interest rate differential in the case of FX.

 

Scott

[BlowFish 10]

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

 

Both parties can open, both can close, or one can open and one can close. In the example you posted C is closing by selling the options they bought on Jan 2nd, E is a brand new buyer.

 

Lets say the brand new ES contract has just started trading. None have traded yet. I can sell you 5 (by going short). I am short 5 you are long 5 and open interest is 5. Clearly no one is closing. In fact if someone had to close, no contracts would ever trade (as no one has a position in the new contract).

 

You do fully understand the concept of being short?