[gregn]

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]

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]

Originally Posted by Kiwi »

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.

Originally Posted by Kiwi »

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.

[KeyToTheCastle]

Originally Posted by gregn »

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]

Originally Posted by KeyToTheCastle »

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]

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

[KeyToTheCastle]

Originally Posted by gregn »

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]

Originally Posted by KeyToTheCastle »

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.