Buyer for Every Seller?

[Buyer for Every Seller?]

Thank you everyone, much appreciated.

 

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

[Buyer for Every Seller?]

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?

[Buyer for Every Seller?]

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).

[Buyer for Every Seller?]

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.

[Buyer for Every Seller?]

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?

[Buyer for Every Seller?]

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 :

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?

[Buyer for Every Seller?]

First off, I appreciate everyone's feedback.

 

In reference to Blowfish's

 

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?

[Buyer for Every Seller?]

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.

[Buyer for Every Seller?]

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.

 

 

This would be like Amazon basing the pricing for it's products on the type of shipping put on the items. For instance, books that had overnight shipping should increase in price and those that have strictly ground shipping should be reduced in price, regardless of the supply:demand ratio.

[Buyer for Every Seller?]

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.

[Buyer for Every Seller?]

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

[Buyer for Every Seller?]

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.

[Buyer for Every Seller?]

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.

 

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.

[Buyer for Every Seller?]

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.