[BlowFish]

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]

First off, I appreciate everyone's feedback.

In reference to Blowfish's

Originally Posted by BlowFish »

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?

[GARYTL]

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]

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 :

Originally Posted by Kiwi »

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]

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]

Originally Posted by BlowFish »

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]

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.....

[ScottB]

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