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Market Auction Theory - backwards?
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Market Auction Theory - backwards?

  #11 (permalink)
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According to AMT, the participants who can really move the market - those who actually take delivery of all those bushels of grain and barrels of oil - aren't primarily using the market for speculation, but for exchange. So if they are in general agreement about a price zone, they just go about their business. And if speculators try to push price too far from that zone, they get slapped back.

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  #12 (permalink)
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Rock Sexton View Post
It's better if you think of it as "the most active price".

I also think this is a good way to think about it. There are different labels we can assign to it, and different ways to think about it. "The most actively traded price(s)," or "the price(s) at which the most volume transacted" are pretty objective and leave little room for debate as to meaning.

A well-known MP advocate uses the term "the most fair price" when referring to the traditionally-labelled POC (or VPOC as the case may be). I like this way of thinking about the auction, in terms of fairness, because it helps to really bring to life the competitive nature of markets, both in the trading world and in real life.

When my favorite ice cream, which is normally $5.99 per half gallon, goes on sale to $3.49 per half gallon, I am lucky to get it, because by the time I get to the store the supply, which is not great at those prices, has been depleted. The price is unfairly low (at an advantage to the shopper, and a disadvantage to the grocery store). The margin for the ice cream was cut in half, and the grocery store cannot afford to continue a sale like this on an ongoing basis, so the prices will be raised back to the more established fair value of $5.99. $5.99 is not exciting for buyers, because it's not a great deal for them, nor is it exciting for the grocery store, since it's the normal price. It's considered a fair value, since that's the price that most units are sold at. Compared to the volume purchased at $5.99, the volume purchased at $3.49 is definitely less. If it greater, then the normal, fair value in the mind of the consumer would be $3.49, not $5.99.

Competition for low prices by buyers will either lead to prices being raised because there is not enough supply at the low prices, or the lower prices will persist, in which case supply is outweighing demand. At that moment, the prices which were previously considered low begin to be perceived as more fair, and this is where the perception of value shifts ($3.29 gasoline is not so bad when you were paying $3.69 all last year, right?).

Value, fairness... it's all part of the market auction and it's the perception of this that makes AMT an appealing way to model markets.

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josh View Post
...So, value means the buyer and seller agree on a price, but chances are that they disagree on the prospects for the future.

This reasoning is no huge revelation, but it really is that simple.


RichardHK View Post
>...
Areas of 'acceptance' and 'rejection' are just resting stages for smart folks/algos to accumulate or distribute holdings before moving on up/down. So just part of the overall game. Would not get hung up on price auction or similar theories written by academics who likely cannot trade well. They are discussing the basic mechanics of trading, not the art or science.


Do we have a conflict or a paradox? if a balance area is just a stage of accumulation/distribution then obviously the dominant group is still present but smarter (better at hiding his intention) and has a strong belief on the prospects for the future direction. I do not see any disagreement here.

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futuretrader View Post
According to AMT, the participants who can really move the market - those who actually take delivery of all those bushels of grain and barrels of oil - aren't primarily using the market for speculation, but for exchange. So if they are in general agreement about a price zone, they just go about their business. And if speculators try to push price too far from that zone, they get slapped back.

"According to AMT"? Says who, or which version? I'm not doubting that this has been said, just curious.

A very small portion (would depend on market, but 3% tops is probably a good estimate) of contracts actually result in a delivery. It makes more sense to purchase the commodity in the cash market when it's needed, and hedge against a price increase/decrease by a purchase/sale in the futures market today. Deliveries through the exchange must be inspected, shipped, and it's easier to just sell and buy it locally. So, I don't think there is any logical reason why people would use the futures market for exchange, nor any actual data to substantiate that, which is why futures deliveries are so rare.

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  #15 (permalink)
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futuretrader View Post
According to AMT, the participants who can really move the market - those who actually take delivery of all those bushels of grain and barrels of oil - aren't primarily using the market for speculation, but for exchange. So if they are in general agreement about a price zone, they just go about their business. And if speculators try to push price too far from that zone, they get slapped back.

That's an interesting thought.

Maybe in many markets that is true. For markets like Crude Oil, and index futures, my impressions is that what drives the market is mostly speculation.

For the grains, a lot of the hedging departments have now become fully fledged speculative trading outfits too, although I'm not sure how that works in percentage terms.

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  #16 (permalink)
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josh View Post
It is not just you DT, but there is a straightforward way to reconcile this seeming paradox.

Agreeing on value must be true. After all, two parties are involved in the transaction and assuming neither is coerced, they each individually make the decision to transact.

But while they agree on value, as shown above, what they disagree on, assuming an outright speculation on both sides, is the future direction of the instrument.

One party happily buys at 500 (though he of course would be okay buying lower most likely), because he sees potential for appreciation. The counterparty happily sells at 500, having either realized a profit and seeing little potential for further appreciation, or selling short and seeing potential for downside.

So, value means the buyer and seller agree on a price, but chances are that they disagree on the prospects for the future.

This reasoning is no huge revelation, but it really is that simple.

True so they agree on value - but one side is thinking it's a good buying price and the other thinks it's a good selling price. So it is an agreement of sorts.

Another way I've been thinking about it of late is....

Most trading is 2 sided, if you think about it,we range more than we breakout - so in these micro ranges we have people buying and selling over a relatively small range of prices, then one side gets trapped and exits, which causes a move. Once that move is over, the micro range, just regular buying and selling continues until one side gets offside and we move somewhere else.

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DarkPoolTrading View Post
I think @josh is spot on. I think it may be best to think of acceptance and rejection areas not in terms of what is happening now, but rather in relation to where perceived future direction is. So in the case of acceptance, both buyers and sellers agree that the current area offers value in terms of where they believe the market will move in the future.

Buyers and sellers disagree upon what direction price will move,....but they never the less agree that this area offers value in terms of their respective future directions (up or down).

Thanks @josh. ah ha moment for me

Funny thing is - the actual future direction will be very much dictated by the fact you have an area with a lot of traders committed and one side ends up puking out.

So for example, an overabundance of people with an opinion to the downside will be the ones that often ensure it goes up!

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They don't agree at any price. That's why they're called 'buyers' and 'sellers'. The paradox exists because the underlying concept of 'agreeing a value' is invalid.

The only dominant price areas of interest from a volume perspective are where there is maximal trading over time at a price, or at price extremes producing maximum capitulation of one side or the other when there is maximal trading at a time.

There is always the same number of buyers and sellers on each side of all actual trades, only the propensity or desire to buy or sell shifts with price over time. Maximum trading volume oscillates between either a price or a time, the market will continually hunt for each in turn.

OK - that said it better than I did!

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DionysusToast View Post
Most trading is 2 sided, if you think about it,we range more than we breakout - so in these micro ranges we have people buying and selling over a relatively small range of prices, then one side gets trapped and exits, which causes a move. Once that move is over, the micro range, just regular buying and selling continues until one side gets offside and we move somewhere else.

This is the essence of how markets work, as modeled by AMT (at least on a small scale anyway). Balance leads to imbalance, which leads to balance, and then rinse and repeat.



DionysusToast View Post
Funny thing is - the actual future direction will be very much dictated by the fact you have an area with a lot of traders committed and one side ends up puking out.

So for example, an overabundance of people with an opinion to the downside will be the ones that often ensure it goes up!

Yes, but this is potentially only for the very near future; sure, stops will drive the market in one direction temporarily. However, at some point there needs to be continued flow in that direction to ensure that it's not pushed back down. If the new higher prices are seen as "too high" ("unfairly high"), then sellers will pressure the market back down to the previous area of acceptance. If they do not do this, then a new area of balance will be established higher.

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I understand it the following way.

Price always tries to find the highest turnover.

That is the job of the price.

In low volume areas there will be no acceptance and in high volume areas there is acceptance.


Check this video from a young guy, he talks about market auction theroy.



Last edited by Balanar; January 21st, 2014 at 09:17 AM.
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