OK, I’ve learned all about supply and demand and I’ve listened to Market Place till I’m blue in the face. I have a reasonable grasp of the “big picture”, but I still don’t know how stock prices actually move.
I know that if you monitor a given stock, say “sford inc”, you will see a series of bids and asks. Every now and then a trade comes through.
Lets say that a trade just happened - say 100 shares of sford at $10/share.
Further say that various brokers around the US have orders to buy and sell sford “at market price”.
What happens now? I assume that it takes an official trader to actually generate a bid or an ask. How does he decide what price to put it at? How does he decide when to change it and by how much?
One last question - can a trader who is holding both buy and sell orders execute the trades himself?
What you don’t see from the stock price is that there’s a whole list of people who want to buy and sell at a different price. When someone puts in a buy order for 100 shares, they can either buy at the market or specify a price.
If they buy at the market, then the first 100 shares at the best price are sold to him.
If he specifies a price, then he waits until a seller is offering his shares at that price.
It works the same for selling shares. He can sell at market in which case the buyers offering the best price will take his shares at the price they (the buyers) are offering. Or he can specify a price in which case he might have to wait for a buyer who is willing to pay that price.
If you could see behind the scenes, it might look like this:
Tom selling 100 shares at 20.50
Bob selling 50 shares at 20.45
Joe selling 100 shares a 20.40
Jan buying 20 shares at 20.35
Lee buying 50 shares at 20.30
If the buyers and sellers agree on price, shares are exchanged and the current price changes. If they don’t agree, then they wait.
So Tom, Bob, Joe, Jan, and Lee all told the trader what price they wanted. If nobody moves, is it their responsibility to change their orders to move closer? I.e. Tom might tell the trader to sell at 20.35, which will trade 20 shares with Jan, leaving an open ask of 80 shares at 20.35. At which point, Lee might decide to change his order to 20.35, at which point 50 more shares change hands.
Is that how it works? And who are Tom … Lee? Are they floor traders? Brokers? Broker clients? Obviously they’re people who have access to the real-time quote stream and spend most of their time monitoring it.
And what happens if you don’t have people specifying prices? I.e. what if everybody is just buying and selling “at market” … how do the quotes get generated? Or is “at market” trading only for small-timers like me and serious people always place orders at particular prices?
The details depend on what market your talking about. There are specialist systems like on the NYSE, electronic systems like Globex, open architecture markets like Nasdaq and foreign exchange, and my favorite - the open outcry pits of futures. Tell me which one you want to know about.
If your trying to understand how auctioning works in its purest form I suggest asking me about futures. If your looking for practical knowledge ask me about any.
What happens is that there are many more than five people interested in buying/selling stock at any time. Also most orders are market orders. Those who have set prices have to wait for the price to move due to the activity of those who have not.
In the NYSE, the bids are kept track by a specialist for the stock. No computers involved until the trade is made. He sets the price according to the supply and demand – if he has more stock available then is requested, he lowers the price; if the requests keep coming in, he raises it. He also matches buyer to seller.
NASDAQ is computerized. Certain companies are market makers in particular stocks, which means (like the specialist), they have to be prepared to buy or sell the stock on demand. (They usually have a reserve of the stock to sell in case there’s a run on it.)
Yes there is, it’s call Level 2 quotes. You can get level 2 quotes from most online trading companies. Well at least for Nasdaq traded stocks anyway.
It’s a long story, and it’s fairly complicated.
First, for Big Board stocks (NYSE). Each NYSE stock has what they call a Specialist on the floor of the NYSE. The Specialist is responsible for setting the bid-ask on his stock. When you order a trade on an NYSE stock it may or may not get to the Specialist on the floor. First your broker looks at your trade, if he actively trades the stock in question, he might just make the trade with you and that’s that. If not, he then looks for a market for the stock. He may trade it for you on an ECN, which is kind of an electronic market that lives in it’s own little world outside of the NYSE. Also, ECN’s are where after-hours trades are made. If he doesn’t trade through the ECN, then he may look at the regional markets (i.e. Chicago) and trade there. And finally, he may just send the trade to the “floor” to the NYSE Specialist. All of this in done through computer networks of course. The Specialist’s job is made easier by a computer system where trades are made automatically. If the Dow Jones index falls or rises over a certain percentage in one day, then the computer is turned off, then program trading must be done ‘by hand.’
Then there’s the Nasdaq. The Nasdaq is strictly an electronic trading system, the Nasdaq has no trading floor. Each stock on the Nasdaq has a group of Market Makers. When you look at Level 2 quotes you will see the bid-ask each MM has for a particular stock. Along with the bid-ask you will see a quantity. If you issue a trade for a Nasdaq stock, your broker basically goes through the same motions as with NYSE stocks. That is, he has several places to make your trade, the final place being on the Nasdaq trading network.
Market orders are executed on a first-come-first-serve basis. Limit orders are stored away and executed when the limit is reached.
The simple way I have always thought of specialists (NYSE) and market makers (NASDAQ) are the “people” who will always take the opposite side of a trade if you cannot make a trade on your own. And they adjust their bid/ask prices based on market supply and demand.
And I think the specialist sets the opening bid/ask prices for that day. I think it is a commom misconception that the opening price is equal to the last day’s closing.
Whew…I am 6 years off a Finance degree (that I didn’t ever actually use) so…if I have made any errors, someone help! I think this is pretty close though.
I think that is generally true but only for market orders. It kind of depends on the stock you are trading too. If you are buying/selling IBM at the market, I would bet trades like that never get past your broker, there’s just too many shares (liquidity) between you and the floor. IMHO of course.
Also, if I remember correctly, there is a system called SIAC (I think) that is constantly broadcasting the last trade along with the current bid/ask. About a half hour before the open, SIAC broadcasts the last trade from the previous day along with the current bid/ask for all the Big Board stocks (not sure how the Naz does it).