Business, Economics, and Taxes: Capitalism. Yay? >=(

[unofan]

If someone on here can explain this to me, I will GrubHub you a steak dinner. I have never found anyone who can explain to me how stock prices are actually set, including my MBA finance professors. They only think at the micro level, on an individual trade basis. What are the macro effects of all the buy and sell orders that are going on? Some simple examples that would illuminate a lot, for me at least:

Example 1: Say price is $50. 5 people say that they want to sell their combined 500 shares. 8 people say that they want to buy a combined total of 400 shares. I presume that the 400 shares trade hands at $50, but there are now an excess of 100 shares that want to be sold. Does that mean that "they" would drop the price to try to attract buyers for those 100 shares? If so, how quickly does the price drop? Do they knock off 1% and wait 1 minute, then drop another 1%? Or is it .1% every 3 seconds?

Example 2: Price is $50. 5 sellers put in standing orders to sell 500 shares at any price over $49. I put in an order to buy 400 shares. I assume I get those shares at $50. Then what happens to the price? Would they drop the price to $49 due to the "excess" standing sell orders, but no lower?

Example 3: Say price is $50. 10 people put in standing orders on 500 shares saying that they'll sell at any price over $55. I put in an order that I want to buy 100 shares, thinking that I'm going to get it for $50. Would "they" raise the price to $55 (due to the "excess" buy demand from me) to make those 100 trades happen (but I pay a 10% higher price than I expected)?

Example 4: Same as example 2, but my buy order included a cap that said I was not willing to pay any more than $50. Would they still raise the price to $51 (even though no trades would happen) since there was a greater signal from investors that the price should go up (as evidenced by the greater number of sell orders at $55 than they have for buy orders at $50)?

Example 1 is easy - 400 shares trade hands at $50, and the price remains at $50 unless and until the next trade is made at a different price. It's up to the seller to either change his asking price, let it sit at $50 until someone buys, or if he's doing a market sell, wait until someone comes in with a buy order at a different price and sells them to him.
Example 2 is also easy - assuming your order to buy 400 shares was at the market price, you'd get them for $49 and set the new price, with the current ask still at $49.
Example 3 depends on your buy order - if you buy at the market price, you'd pay $55 because that's the current ask and set the new price.
Example 4 - no sale happens because the bid and the ask don't match, therefore the listed market price stays at $50 because that is still the last recorded sale. Someone else would need to come in or someone needs to flinch.

If you delve into the markets, you'll see the highest bids and lowest asks outstanding for a given stock. High frequency traders and the brokerages will make money off the spread by buying at the bid price and then hopefully reselling at the ask price over and over and over again (or vice versa, selling at the ask and then hopefully re-buying at the bid). So for retail investors like you or me trying to sell 100 shares of a stock, the brokerages will often simply handle that themselves by buying your 100 shares at the bid price and then turning around and selling them at or slightly lower than the latest ask price (or vice versa, they'll sell shares to you at the ask price and then rebuy them at the current bid price or slightly higher).

 

[Handyman]

I wrote a nice long wall of text and realized I read his question wrong. I answered it based on what the buyers and sellers should do (which is almost impossible to answer) and not on how the actions of the example affect the price in the market. Skip a couple words cause you are tired and you waste 20 minutes typing for nothing. Thankfully unofan is much better at this than me!

Time for another cup of coffee...nice write up uno!

 

[SJHovey]

If someone on here can explain this to me, I will GrubHub you a steak dinner. I have never found anyone who can explain to me how stock prices are actually set, including my MBA finance professors. They only think at the micro level, on an individual trade basis. What are the macro effects of all the buy and sell orders that are going on? Some simple examples that would illuminate a lot, for me at least:

Example 1: Say price is $50. 5 people say that they want to sell their combined 500 shares. 8 people say that they want to buy a combined total of 400 shares. I presume that the 400 shares trade hands at $50, but there are now an excess of 100 shares that want to be sold. Does that mean that "they" would drop the price to try to attract buyers for those 100 shares? If so, how quickly does the price drop? Do they knock off 1% and wait 1 minute, then drop another 1%? Or is it .1% every 3 seconds?

Example 2: Price is $50. 5 sellers put in standing orders to sell 500 shares at any price over $49. I put in an order to buy 400 shares. I assume I get those shares at $50. Then what happens to the price? Would they drop the price to $49 due to the "excess" standing sell orders, but no lower?

Example 3: Say price is $50. 10 people put in standing orders on 500 shares saying that they'll sell at any price over $55. I put in an order that I want to buy 100 shares, thinking that I'm going to get it for $50. Would "they" raise the price to $55 (due to the "excess" buy demand from me) to make those 100 trades happen (but I pay a 10% higher price than I expected)?

Example 4: Same as example 2, but my buy order included a cap that said I was not willing to pay any more than $50. Would they still raise the price to $51 (even though no trades would happen) since there was a greater signal from investors that the price should go up (as evidenced by the greater number of sell orders at $55 than they have for buy orders at $50)?

You might enjoy Michael Lewis book, Flash Boys. I'll admit, I'm a big Michael Lewis fan, but this book is excellent.

https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599

 

[aparch]

I have nothing to add right now other than I appreciate the crowdsourcing of knowledge I have learned via this thread. I've been enjoying "hanging up and listening" to this all explained.

 

[TalonsUpPuckDown]

You might enjoy Michael Lewis book, Flash Boys. I'll admit, I'm a big Michael Lewis fan, but this book is excellent.

https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599

+1

Liars Poker is another Lewis financial winner.

 

[Slap Shot]

Yes. That is what it means.

So in theory hedge fund controllers could sell to each other at ridiculously low prices to 'artificially' drive the price back down? Not sure if that would present a net benefit to them within the current climate for Gamestop but it got me thinking.

I am superbly unsavvy on these matters. I can manage my 401(k) just fine and I have done well with stocks (namely Wal-Mart and a few others) but honestly a lot of this is way over my head.

 

[French Rage]

+1

Liars Poker is another Lewis financial winner.

+2. He does lot of good stuff, but Flash Boys was the best IMO.

 

[Jimjamesak]

So in theory hedge fund controllers could sell to each other at ridiculously low prices to 'artificially' drive the price back down? Not sure if that would present a net benefit to them within the current climate for Gamestop but it got me thinking.

I am superbly unsavvy on these matters. I can manage my 401(k) just fine and I have done well with stocks (namely Wal-Mart and a few others) but honestly a lot of this is way over my head.

Yes they can do that. They’d be fined by the SEC for market manipulation but they can do that.

 

[Handyman]

So in theory hedge fund controllers could sell to each other at ridiculously low prices to 'artificially' drive the price back down? Not sure if that would present a net benefit to them within the current climate for Gamestop but it got me thinking.

I am superbly unsavvy on these matters. I can manage my 401(k) just fine and I have done well with stocks (namely Wal-Mart and a few others) but honestly a lot of this is way over my head.

As Jim said yeah they can do that. That is an effective way to try and stop a short squeeze. This is a nice write up of some tactics used.

The fines they pay for the collusion and manipulation will be pennies compared to what could happen if they don't stop the squeeze. There were people on CNBC I believe last week who were basically saying this would happen and that the market would allow it to try and stop WSB and the retail market. You will pay millions to prevent the potential loss of billions.

aparch,

I learned more in this thread than I did in 2 years of MBA classes. Outside of a simulation game we played about creating a business (in which my group finished in the top 100 in the world for all MBA programs) seeing things practically will always be better than reading theory and such. We are seeing in real time not only how the market can be exploited but how the money people are allowed to break every rule just to prevent the plebes from taking advantage of said exploits. Very interesting stuff and the resources that are being put out for mass consumption are A+!

 

[Kepler]

Reason I'm never homesick #78:

 

[Slap Shot]

As Jim said yeah they can do that. That is an effective way to try and stop a short squeeze. This is a nice write up of some tactics used.

The fines they pay for the collusion and manipulation will be pennies compared to what could happen if they don't stop the squeeze. There were people on CNBC I believe last week who were basically saying this would happen and that the market would allow it to try and stop WSB and the retail market. You will pay millions to prevent the potential loss of billions.

aparch,

I learned more in this thread than I did in 2 years of MBA classes. Outside of a simulation game we played about creating a business (in which my group finished in the top 100 in the world for all MBA programs) seeing things practically will always be better than reading theory and such. We are seeing in real time not only how the market can be exploited but how the money people are allowed to break every rule just to prevent the plebes from taking advantage of said exploits. Very interesting stuff and the resources that are being put out for mass consumption are A+!

Ok, thanks to you and Jim for the explanation.

 

[Jimjamesak]

As Jim said yeah they can do that. That is an effective way to try and stop a short squeeze. This is a nice write up of some tactics used.

The fines they pay for the collusion and manipulation will be pennies compared to what could happen if they don't stop the squeeze. There were people on CNBC I believe last week who were basically saying this would happen and that the market would allow it to try and stop WSB and the retail market. You will pay millions to prevent the potential loss of billions.

Yeah, everyone watching knew this was going happen and that the SEC will do nothing to stop it. But it does seem that the r/WSB folks knew this as well and are holding the line for the most part. In fact, most of them seem to be buying more. At some point the shorts will be called in and r/WSB will be holding most of the shares.

 

[SJHovey]

Yeah, everyone watching knew this was going happen and that the SEC will do nothing to stop it. But it does seem that the r/WSB folks knew this as well and are holding the line for the most part. In fact, most of them seem to be buying more. At some point the shorts will be called in and r/WSB will be holding most of the shares.

I think it would be really interesting to know how many of the WSB guys are posting HOLD! while quietly profit taking as this stock drops from its high.

 

[Jimjamesak]

I think it would be really interesting to know how many of the WSB guys are posting HOLD! while quietly profit taking as this stock drops from its high.

Judging by the volume of shares being traded, not very many.

 

[Handyman]

Yeah you would think it would be higher than it appears to be. I would assume some are unloading a few shares here and there to stay liquid (like pulling winnings off the crap table while keeping your bets active for the roll) but unless the volume is off there is no way anyone is hamstringing the bottom of the pyramid yet. With the price where it is now it makes almost no sense to unload anyways. Now it is a playing out the string...keep making the hedges pay out to tank the price or end their shorts.

I can't see this lasting much longer unless people start buying again that aren't on the ladder. Price is almost attractive enough now that it is under $100 if you think you can (pardon the pun) squeeze another jump out of the market.

 

[Kepler]

I think it would be really interesting to know how many of the WSB guys are posting HOLD! while quietly profit taking as this stock drops from its high.

Not everyone is like you, Hov.

 

[geezer]

why don't hedge funds short it when it's at 200x value or whatever to cover their bets? Did they run out of liquidity to maneuver?

 

[LynahFan]

why don't hedge funds short it when it's at 200x value or whatever to cover their bets? Did they run out of liquidity to maneuver?

They have to find someone who will lend them a share to sell. I sure wouldn't right now - moral judgement aside, I'm not convinced they would ever be able to pay me back.

 

[St. Clown]

If someone on here can explain this to me, I will GrubHub you a steak dinner. I have never found anyone who can explain to me how stock prices are actually set, including my MBA finance professors. They only think at the micro level, on an individual trade basis. What are the macro effects of all the buy and sell orders that are going on? Some simple examples that would illuminate a lot, for me at least:

Example 1: Say price is $50. 5 people say that they want to sell their combined 500 shares. 8 people say that they want to buy a combined total of 400 shares. I presume that the 400 shares trade hands at $50, but there are now an excess of 100 shares that want to be sold. Does that mean that "they" would drop the price to try to attract buyers for those 100 shares? If so, how quickly does the price drop? Do they knock off 1% and wait 1 minute, then drop another 1%? Or is it .1% every 3 seconds?

Example 2: Price is $50. 5 sellers put in standing orders to sell 500 shares at any price over $49. I put in an order to buy 400 shares. I assume I get those shares at $50. Then what happens to the price? Would they drop the price to $49 due to the "excess" standing sell orders, but no lower?

Example 3: Say price is $50. 10 people put in standing orders on 500 shares saying that they'll sell at any price over $55. I put in an order that I want to buy 100 shares, thinking that I'm going to get it for $50. Would "they" raise the price to $55 (due to the "excess" buy demand from me) to make those 100 trades happen (but I pay a 10% higher price than I expected)?

Example 4: Same as example 2, but my buy order included a cap that said I was not willing to pay any more than $50. Would they still raise the price to $51 (even though no trades would happen) since there was a greater signal from investors that the price should go up (as evidenced by the greater number of sell orders at $55 than they have for buy orders at $50)?

Selling and buying agents will find multiple customers of theirs to come together, forming what’s called a “block” trade - a block of clients, not blocking transactions from happening. A block can be as few as two clients, as many as their accounting system will allow, or something in between. These are very common, all customers get the same price, but the net proceeds are then divided out based upon quantity of shares each client sold or bought within the block. All clients within the block have the same transaction type.

The counter party can be a single client for the contra broker, or a block of clients with the opposite motive.

These blocks are very common when an investment manager has a group of clients and is performing a portfolio realignment.

 

[SJHovey]

Not everyone is like you, Hov.

That probably explains why the world is as farked up as it is.


All joking aside, you can't tell me that there hasn't been some profit taking by these reddit guys, and that they're not sitting there weighing the social justice value of sticking it to the hedge funds with the cash value of selling.