Post #388,262
4/6/14 8:57:20 PM
4/6/14 9:03:11 PM
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Poor assumption
You have 10,000 shares of XYZ. You want to sell it. You tell your broker (or click the sell button) to sell it.
Guess what. There is no one looking to buy it. You're fucked. Your stock has NO value until a buyer is found. And since the a single buyer (once found) knows there are no other buyers in the wings, he can bargain with you and drive the price down. Or tell you to jam it, he's not buying.
A "market maker" has made a deal with the stock exchange. He promises to buy a certain number of shares based on a percentage difference price of the last deal made. He is obligated to buy those shares. He can alter the price a small amount, after purchasing those shares, but he MUST buy them. This means the trade is guaranteed to happen, and there will ALWAYS be a buyer for the stock.
If there are people with open buy orders for that stock, and if they are willing to pay more than the market maker buy price, but less than the market maker sell price, then the stock exchange is obligated to match those orders, they are not sold to the market maker, they are sold to the people who offered more.
Without market makers, stocks would have the same liquidity as houses, with the same dramatic price drops or no sale time.
Edited by crazy
April 6, 2014, 09:03:11 PM EDT
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Post #388,263
4/6/14 9:02:16 PM
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Why does a nsec matter in such cases?
Serious question.
I think we all agree that liquidity is good. Markets are good.
But why should someone who can put themselves in the middle of a trade for a few nsec faster than someone else be guaranteed a profit?
Surely not all HFT is done by market makers?
Thanks.
Cheers,
Scott.
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Post #388,264
4/6/14 9:12:57 PM
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Not a market maker issue
Distance to alternative venue issue. YOUR broker has paid for a single connection to a single exchange. HFT has paid for connections to many exchanges. If you want to by XYZ, and the last trade cost X dollars, and the local price is X+2, but it's X+1 somewhere far away, then the HFT trader can go grab it far away and offer it locally, slightly undercutting the local offer. This is good for the local buyer, bad for the local seller, and good to normalize pricing. So the local seller is PISSED, and demonizes it because the HFT just "stole" the difference. But HFT also saved the buyer some money. HFT drives down pricing arbitrage profits, which is why it makes less $$ every year as tech gets better and cheaper and more people can do it.
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Post #388,265
4/6/14 9:27:47 PM
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That makes sense.
It still seems ridiculous to me that it's somehow sensible to run a market this way, though. Why not have an agreement among the markets that the market's active bid price will an average over the previous 5 seconds, and the ask price similarly over the previous 5 seconds. Or something similar. Why have a system that depends so much on speed when people in the real world don't?
How do fast and wild price swings help the stockowners or the companies or the economy? They only seem to help the brokers who can play the spread in quasi-real time.
It's crazy and invites wild swings by computers that will break down and will enter pathological states on occasion, as we have seen.
This reminds me... One of my old bosses found a stock that regularly cycled between $20 and $40. It did it for years on end. He said he made quite a bit of money buying at $20 and selling at $40... (Of course, the cycle eventually ended.) That was over months, though, not msec.
Cheers,
Scott.
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Post #388,267
4/6/14 9:51:45 PM
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You can make pricing rules for the market makers, but not
the independents.
Someone may want to accumulate a stock over time. He can put in a variety of bids, different prices, active different amounts of times. Would you tell him he can't bid this way?
Someone shows up in the market, needs cash fast, and offers more shares than the market maker can absorb. Must he price it higher due to the rule, and then get no buyers? Brokers have hundreds or thousands of clients that must take these orders and then send them up to the exchange, constantly.
If you make it a law, it will only happen in the US, and then the trades will happen out of the US. Will you put capital flow controls in place to avoid this? Then the stocks themselves will move, and the US will simply be out of the game.
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Post #388,268
4/6/14 10:21:15 PM
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I knew it was complicated. Thanks. Still...
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Post #388,297
4/7/14 4:00:36 PM
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what the boss did is surfing the market
quite a few stocks swing in a regular pattern, time the pattern and make some money.
Any opinions expressed by me are mine alone, posted from my home computer, on my own time as a free American and do not reflect the opinions of any person or company that I have had professional relations with in the past 58 years. meep
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Post #388,516
4/13/14 8:45:49 AM
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Re: There is no one looking to buy it.
Not true. There may be no one to buy at or sell at the recent prices. And, there may not be offers/bids in the volume an institution needs. But, there are always offers to buy or sell at prices away from recent prices. There's a stack of them on both sides. I have "level 2" visibility of these orders. They just sit there waiting for folks who make "market orders", i.e. buy or sell at the best available price. If nothing else, someone will offer to buy 100,000 shares of IBM at a penny a piece or sell them to you at $1000 a share.
I always use limit orders so I know the max I will pay or the min I will get. Heck, I often pick a price that's inside the current best bid offer spread. Sometimes those orders just expire at the end of the day, but mostly they do get executed.
Alex
ÂThere is a cult of ignorance in the United States, and there has always been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that "my ignorance is just as good as your knowledge.Â
-- Isaac Asimov
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