What causes the ASK and BID price to change? | Traders Hideout


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What causes the ASK and BID price to change?

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New York, NY
 
Trading Experience: Beginner
Platform: Vanguard 401k
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Market makers adjust their bids and offers depending on the fundamental value of the product.

Let's take this example to the extreme. Let's say I'm going to be a market maker on used underwear. No one (I think) wants to buy or sell used underwear because of obvious reasons, and I'd probably be the only market maker for used underwear.

I don't necessarily know what the price of used underwear is, but if someone exploits this to load me with a ton of used underwear with human feces on it, that would be pretty toxic and I'd lose money, so I would bid very low at 100@$0.01. I risk being unable to short locate if someone buys the underwear from me, so I would offer very high at 100@$9999.99.

Now suppose I hear that some pervert is coming around and is buying all the used and unused underwear, I anticipate that the fundamental value of used underwear has gone up because of the underlying demand, and I could widen my offer to 100@$15000.00. No trades are needed for me to price my quotes.

This mechanism is similar to how bookkeepers quote their bets.

I don't actually know a single thing about basketball. But I can still be a great bookie for basketball betting. Let's say I offer a bet that pays you $10 for every point difference between how many points the Jazz acutally scores in a game against the Warriors.

It's unlikely for them to score nothing or score 200 points, so I can safely quote 1 point against 200 points. I'd make a killing if people sell me tickets at 1 point because those bets will be worth $900 if they end the game at 90 points. I'd also profit if people buy tickets from me at 200 points because my counterparties will have to pay me $1100.

Now if no one wants to bet, I can tighten the spread. If the game starts, I can continue to adjust my quotes according to the game score, but no one actually has to trade against me at the spread.

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