In the stock market, who sets the bid and ask prices? I would expect it to be the market maker since, as I understand it, they are committing to buying and selling stocks at those prices. Does the stock exchange regulate or restrict the setting of bid and ask prices in any way?
The bid and ask prices are set by buyers and sellers. The buyers bid and the sellers ask. The strike price is where the two agree to a selling price. The market in a sense does regulate bid and ask prices by the very nature of supply and demand.
If there is a tremendous supply of stock (shares which holders want to sell) the ask price will fall until it meets the bid or strike price. If there is a tremendous demand for a limited amount of stock then the converse is the order of the day.
The major exchanges do have limits which can be reached which shut down all trading for a particular day. Its known as curbing in. This is in response to programmed trading which in the late 80’s and early 90’s caused tremendous upheavals in the market.
Now when the market goes down or up by about 150-200 points trading is halted for a limited time. This prevents programmed trading from pushing the market out of what “reasonable” traders are willing to pay or sell.
You must mean something different than what’s usually meant by buyers and sellers. I buy and sell stock so I would normally consider myself a buyer and/or seller. Yet I don’t set the price unless I do a limit order. If I buy and sell at the market, then someone else sets the price I buy at.
I think he means that the market maker decides the bid and ask price, but based on what buyers and sellers are willing to pay.
But I’m willing to be corrected.
In many cases, you might not choose to take advantage of the option of a buyer or seller to set ask and bid prices (i.e. telling your broker to “Buy 100 shares of X if it drops to $57” or “Sell Y at $60”. In many cases you simply wish to acquire/divest shares at roughly the current market price. However, you do have the option of setting your own price; you simply risk the transaction not going through (i.e. if you can’t find a seller/buyer willing to complete the trade at that price).
Though I don’t know the exact mechanics of today’s computerized trading floor, I saw US stock exchanges and European equivalents (Bourses) in the 70’s/80’s, where the floor traders ran around to negotiate (or simply shouted) offers and acceptances to the market maker, according to the orders they recieved from their clients.
KP, that option is known as limit orders, which I mentioned in an earlier thread.
What I want to know is who sets the ask and bid prices that I see on my broker’s web site. They don’t necessarily have anything to do with the last transaction price. While they usually bracket the last transaction price, I’ve seen them be as much as 20 cents away. Also, I’ve seen the ask and bid change with no transaction having taken place (the volume not having changed since the last time I did a query.)
NYSE stocks (the big board) have “specialists” that set the bid/ask according to supply and demand. The Nasdaq market stocks bid/ask are set by the “market makers”. You can watch the Nasdaq market makers in action if you have “level 2 quotes”. You can’t always be certain of the movement of a stock watching the level 2 quotes, market makers are allowed to post “head fake” quotes, and they do. Also the volume on a level 2 quote is only a “posted volume”, the market maker can actually trade as many shares as they want at the price quoted.
There has been some recent controversy surrounding the actions of the big board specialists:
Another site on the subject: