Buyer for Every Seller?

[gregn 10]

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.

[sappjason 10]

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.

 

The guy at $10.04 with 2200 units would get his fill when enough buyers enter the market (or current buyers shift their prices upwards for whatever reason) until the $10.04 ASK gets exposed and people start eating away at his 2200 units with buy orders (market or limit buy orders).

 

When you say a "market maker" lifts the bid/ask prices, I'm assuming you mean that the MM just moves his current bid/ask orders (or adjusts their prices). But, its an entirely different story if the MM has $10.00-500 BID and $10.01-1000 ASK and someone comes into the market with a 5000 BUY MKT order. In this case, the $10.01 x 1000 shares would be lifted, because they were BOUGHT by the 5000 MKT ORDER. Therefore, the $10.01 ASK price would disappear (exposing the next best ASK price above $10.01 which doesn't necessarily have to be $10.02---it could be $10.06----whatever is in the book at the time), because the 5000 share MKT ORDER executed against them.

[gregn 10]

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?

 

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).

[gregn 10]

The guy at $10.04 with 2200 units would get his fill when enough buyers enter the market (or current buyers shift their prices upwards for whatever reason) until the $10.04 ASK gets exposed and people start eating away at his 2200 units with buy orders (market or limit buy orders).

 

When you say a "market maker" lifts the bid/ask prices, I'm assuming you mean that the MM just moves his current bid/ask orders (or adjusts their prices).

 

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?

[Tams 20]

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.

 

MM are buyers/sellers too. MM don't grow on trees.

Where do you think the shares/contract/option went when a MM buys it? under the pillow?

[sappjason 10]

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?

 

People set the bid/ask prices. That's the simple answer. Sometimes its you and me simply using limit orders. Other prices are set by the various market makers... Many times these days, its computers that are programmed by people, but the bottom line is that its people using LIMIT ORDERS... You can see this yourself if you want. Pick any stock. Bring up level 2 quotes and enter a limit order way outside the market. If a particular stock is trading at $10.00 / $10.01, then for your test, enter a limit buy order for 100 shares at $8.00. You will see your order appear in the book.

Edited November 19, 2010 by sappjason

[Tams 20]

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

 

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

 

 

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?

...

Gabe

 

oh yea, the other party is called "Hot Air", right?

 

 

ps. you can edit out a paragraph for focus, but don't edit out part of a qualifying sentence to meet your twisting argument.

Edited November 19, 2010 by Tams

[BlowFish 10]

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?

 

The participants, me, you, whoever. Anyone that places a limit order through their platform.

[gregn 10]

Thank you everyone, much appreciated.

 

Hey Blowfish -- do you still trade using Jerry's MP techniques?

[SUTTS 10]

Thank you everyone, much appreciated.

 

 

Gregn,

 

I think what you might be missing is this....

 

The order book has already been well described. This is in effect a price ladder with the volumes people are willing to buy or sell at each price level.

 

The BID and ASK prices we see when we trade represent the Inside Spread...this is simply the best BID and ASK prices taken straight from the order book and is presented automatically by the software that controls the electronic market.

 

The best BID price is the highest price that someone is willing to buy from you in the current order book. This may represent only 1 contract though.

 

The best ASK price is the lowest price that someone is willing to sell to you in the current order book. Again this may represent only 1 contract and could be eaten through quickly.

 

So the current bid and ask prices are really just the best deal from a buyer and seller point of view available at the current time in the order book.

 

 

Then we need to consider the different order types. Limit orders (placed by patient traders) just sit in the order book waiting to be hit by market orders (placed by impatient or highly motivated traders).

 

Limit orders are liquidity providers while market orders are liquidity consumers. I don't believe price would move if it wasn't for market orders. When you place a market order you are telling the market that you want to buy or sell X number of contracts at WHATEVER PRICE IS NECESSARY to get a fill for the entire order. This is giving the electronic market mechanism the permission to fill your order from the available liquidity at the current price and then move up the ladder (when buying) or down the ladder (when selling) as necessary until the order is complete. This mechanism is what moves the price, not the MM moving price artificially.

 

Of course, if a trader has deep pockets and the market is currently thin they can buy or sell huge volumes which will quickly eat through the current market book offerings and lead to a rapid spike in prices.

 

Something I haven't mentioned is stop orders. When stop orders trigger en-masse they can lead to rapid spikes in price. This is because stop orders are really delayed market orders which are submitted to the market when the trigger price is reached. If they were submitted as limit orders the price would not cascade like we see on our charts. A market order demands an immediate fill at any price and will drive the price higher or lower to get that fill. When masses of market orders hit the market at the same time the price can jump dramatically, especially around news time when many of the sitting limit orders (liquidity) in the book have been removed due to pre-news uncertainty.

 

Hope this helps!

[Gabe2004 10]

oh yea, the other party is called "Hot Air", right?

 

 

ps. you can edit out a paragraph for focus, but don't edit out part of a qualifying sentence to meet your twisting argument.

 

Thank you for your kind words (as usual)

[gregn 10]

I think what you might be missing is this....

 

This is exactly what I was missing. Thank you so much for that.

 

I don't believe price would move if it wasn't for market orders.

 

This what I began suspecting while reading prior posts by other contributers.

 

There is quite a wealth of knowledge on these forums - you guys are great, thank you.

[uexkuell 10]

Limit orders (placed by patient traders) just sit in the order book waiting to be hit by market orders (placed by impatient or highly motivated traders).

 

Nope.

 

The "order book" is in reality a program that is designed to match orders (a "matching algorithm") - all kind of orders.

 

 

This is because stop orders are really delayed market orders which are submitted to the market when the trigger price is reached. If they were submitted as limit orders the price would not cascade like we see on our charts.

 

Not true.

Stop orders can be of different kind.

It is well possible to place stop limit orders that are executed as one might expect.

 

For reference:

http://www.cmegroup.com/globex/files/GlobexRefGd.pdf

search for "stop limit order", page 12.

(The actual mechanism is slightly different for different exchanges.)

 

When price is moving very rapidly in one direction this can be due to stop limit orders residing at several different levels being punched through, thin order book or market orders coming in very fast (and probably some other reasons that don't come to my mind in the moment).

[Kiwi 16]

Lots of good stuff. And lots of confusing stuff. Because this is complex and different exchanges do behave slightly differently.

 

Two clarifying things though re the last post:

- if you have two limit orders, a buy at 10 and a sell at 11, the best matching algorithm in the world won't match them, a new or modified order is required

- most worst case exit and even standard exit stop orders are stop market orders; many or maybe most entry stop orders are stop limit orders and the limit may actually require a better price than the triggering stop.

[SIUYA 11]

the question was asked.

"There needs to be a mechanism, either automated or human to move the price based on the input."

This was followed up with "What sets the current bid ask" etc; etc;

 

Markets work and work efficiently when you have free and open access, lots of competition, transparency and willing participants. (Plus other stuff)

Basically markets these days are much more open than they were 10 years ago. More participants, more access, better technology, more transparency.

this is the mechanism that allows people to assess, prices, participate, move prices and orders.The platforms that provide the market place, that provide access to the market place a vital. Once you have people who can access a market place, and opposing view points..... you have the mechanism for a market. Even if its betting on a football game. there are buyers and sellers, and the price is the point they will exchange bets. There is no global conspiracy of market makers, there is no cartel of banks .... there are just participants. the market does not care who you are or what you think.

(yes, yes there is but no there is is not )

 

Completely different to the ideas of value.

[SUTTS 10]

Nope.

 

>>The "order book" is in reality a program that is designed to match orders (a "matching >>algorithm") - all kind of orders.

 

OK, point taken. A limit order may be matched against another limit order if there is an exact match on price.

 

 

 

>>Not true.

>>Stop orders can be of different kind.

>>It is well possible to place stop limit orders that are executed as one might expect.

 

Yes, there are several types of stop orders and I should have been more specific. As mentioned in another post, the only effective way to implement a stop loss is through a stop market order. Using any other stop type would leave you open to a partial fill or no fill at all at a critical time when you NEED to get out. I was talking about the big effect stop orders can have on price when they trigger en-masse at a key level. It is stop MARKET orders that have this effect, not stop limit orders.

 

 

>>When price is moving very rapidly in one direction this can be due to stop limit orders >>residing at several different levels being punched through, thin order book or market >>orders coming in very fast (and probably some other reasons that don't come to my >>mind in the moment).

 

I agree that rapidly moving price can be caused by a thin order book and market orders coming in fast. But stop limit orders cannot have the same price-chasing effect that a stop market order can. The best they can do is help erode a volume barrier at a specific price, allowing market orders to progress further up or down the price ladder as a result.

 

For example:

 

The order book currently looks like this:

 

A $10.05 x 400

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

 

Current ASK is 10.01 and current BID is 10.00.

 

A BUY stop limit order for 4000 contracts is triggered at $10.01.

The only effect this has on price is to eat through the 500 available contracts at $10.01, moving the current ASK price to the next level in the price ladder at $10.02.

That's a 1 cent move.

 

Now, let's turn that buy stop limit order into a buy stop MARKET order instead and see what happens to price.....

 

The market order executes and chases price up the ladder to gain a fill. This takes out all the sitting sell orders at the 10.01, 10.02, 10.03 and 10.04 levels and leaves only 200 contracts remaining at the $10.05 level. That's a 4 cent movement in price compared to a 1 cent move for the limit order.

 

Now, say $10.04 was a key breakout level and short sellers have a bunch of stop orders clustered behind this level at $10.05. These are almost certainly buy stop market orders.

 

The last big market order successfully triggers these stops which results in an immediate and massive influx of buy market orders at the $10.05 level. Being market orders, these have no limit on the price at which they will seek a fill. The result of this is a further surge in price up the price ladder, possibly tripping further buy stops higher up.

 

This is the cascading effect that stop MARKET orders have on price. Stop LIMIT orders could not possibly have the same effect since they do not have the capacity to chase price up the ladder. The most they can do is help market orders eat through key levels of support or resistance at specific price levels. They do not cause price to move rapidly.

[suckassjuice 10]

When things are quiet and concerns are low about being unable to buy in or sell out (i.e., there's plenty of size on both the bid and ask and even at levels just about/below the market) this is just about as close to a balanced market that you can get. But even then, trader A knows he's stuck in a trade and by chance Trader B knows it too. Since information is money B intends to use some 'motivational' trades to put A on tilt (aka, perform a shekel shakeout smackdown like the pro he is). By representing through some strategically sized and tactically timed orders, B comes off as a real player--highly motivated and clearly aggressive. Regardless if any other traders know what's going on, they simply are now witnessing transactions wiping out all standing bookorders up to 3 price levels away from the inside market. Other traders aren't interested initially on whats the reason; they just want to protect capital. At such a time, there's no reason to be a dick for a tick, So traders continue to step all over each other hitting resting orders farther and farther away from the inside market which is causing a unidirectional move at a breathtaking pace. And that's what happens when there's big size on one side willing to chase price while everyone on the other side is making snap decisions that they can get a better price later on so they step away from the market altogether to see when another equilibrium will establish itself. It's more about the dance leading up to the making of a market. The point in time in which able and willing participants ink a deal (i.e., make the trade), is just that a singular point. It's the nature of the underlying dynamics that determine how price movement will play out. In this case, A was weak ultimately had to liquidate his entire position of which B gladly picked up a majority of A's unwinding.

[gregn 10]

I just remembered... no one answered why the times and sales does not show both sides to the trade. If there is a buyer for every seller, how can there be a buy of 1 in the T&S without a sell of 1?

[gregn 10]

I just remembered... no one answered why the times and sales does not show both sides to the trade. If there is a buyer for every seller, how can there be a buy of 1 in the T&S without a sell of 1?

 

 

Does the T&S only show market orders?

[ant 10]

I just remembered... no one answered why the times and sales does not show both sides to the trade. If there is a buyer for every seller, how can there be a buy of 1 in the T&S without a sell of 1?

 

T&S shows trades that have occurred and whether they occurred at the bid or ask price. Each trade requires a buyer and seller. How can someone buy without a seller or how can someone sell without a buyer? For a trade to occur, either the buyer or seller has to go to the market.

[sappjason 10]

Slight correction... The T&S shows trades that have occurred and at what price. A trade does not always have to occur at the "visible" bid/ask. You could have $22.10 bid x $22.15 ask and have a trade tick off on the T&S at $22.13. A complete T&S will also show all bid/ask price and size changes as well.

 

Jason

 

T&S shows trades that have occurred and whether they occurred at the bid or ask price. Each trade requires a buyer and seller. How can someone buy without a seller or how can someone sell without a buyer? For a trade to occur, either the buyer or seller has to go to the market.

[ant 10]

Slight correction... The T&S shows trades that have occurred and at what price. A trade does not always have to occur at the "visible" bid/ask. You could have $22.10 bid x $22.15 ask and have a trade tick off on the T&S at $22.13. A complete T&S will also show all bid/ask price and size changes as well.

 

Jason

 

Yes, the trade can occur in between bid and ask. I was just trying to keep it simple.

[SIUYA 11]

I guess the important thing to remember here is that ALL the bids and offers that are shown in the market are in fact hypothetical. (Yes they are live, but they are indications of price and volume)

The relevant thing to watch is the actual trades. The actual commitment of money. How often have people seen what looks to be lots of sellers suddenly disappear.

 

Everything always has a bid ask spread -( everything! )

But whether it trades there is a different matter.

[BlowFish 10]

I guess the important thing to remember here is that ALL the bids and offers that are shown in the market are in fact hypothetical. (Yes they are live, but they are indications of price and volume)

The relevant thing to watch is the actual trades. The actual commitment of money. How often have people seen what looks to be lots of sellers suddenly disappear.

 

Everything always has a bid ask spread -( everything! )

But whether it trades there is a different matter.

 

If you can hit an order before they can pull it the market will trade there. They are actual resting orders which can of course be pulled.

 

BTW, When I traded on the Nasdaq many moons ago you quite often would have the best bid equal the best ask (a spread of zero if you like). In fact the best bid could be higher than the best ask (a 'crossed market'). This was because the Nasdaq is not a centralised marketplace, it is a bunch of different 'networks' each with there own queues and matching algorithms. Of course this situation would get quickly arbed out.

[SIUYA 11]

If you can hit an order before they can pull it the market will trade there. They are actual resting orders which can of course be pulled.

 

BTW, When I traded on the Nasdaq many moons ago you quite often would have the best bid equal the best ask (a spread of zero if you like). In fact the best bid could be higher than the best ask (a 'crossed market'). This was because the Nasdaq is not a centralised marketplace, it is a bunch of different 'networks' each with there own queues and matching algorithms. Of course this situation would get quickly arbed out.

 

absolutely.

Hence, it goes from being theoretical to being an actual recorded trade.

 

tracking this might be of value for all those folks who track the sub second bids and offers but thats a different ball game in my book.

I always used to laugh at the folks who would say, but the buyers were there just a second ago, what happened to them! Do they stop being buyers? were they propping the market? did they get filled?