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What causes the ASK and BID price to change?
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What causes the ASK and BID price to change?

  #1 (permalink)
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What causes the ASK and BID price to change?

I understand how trades get filled - market orders at the ask or the bid. When there are no more booked orders at those prices change occurs. But, there are times while watching the DOM and TnS the ASK or BID change prices changes and it appears as if nothing has traded. From a market mechanics point of view how do ASK and BID price change?

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  #3 (permalink)
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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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artemiso View Post
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.

This is also why people describe market making as similar to running a casino. You have a built-in edge into the game so that whether people buy or sell from you, you make money.

But it's not that easy, because there's a lot of other casinos that people can go to to place the same bet, and the exchange facilitates electronic quoting of every market maker's best bid and offer, which makes the pricing extremely competitive.

It's easy for me to make money if I'm the only market maker on the Jazz game quoting 1 point against 200 points, but if there's another market maker quoting 90 points against 110 points, he takes away all of my business.

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artemiso View Post
This is also why people describe market making as similar to running a casino. You have a built-in edge into the game so that whether people buy or sell from you, you make money.

But it's not that easy, because there's a lot of other casinos that people can go to to place the same bet, and the exchange facilitates electronic quoting of every market maker's best bid and offer, which makes the pricing extremely competitive.

It's easy for me to make money if I'm the only market maker on the Jazz game quoting 1 point against 200 points, but if there's another market maker quoting 90 points against 110 points, he takes away all of my business.

Another interesting corollary of this is that any accusation that electronic market makers make money at the expense of regular traders is just impossible.

The market maker who beats me with a spread of 90-110 only takes away all of my profit, but the people who are actually betting at the casino are being offered a better price.

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tulanch View Post
I understand how trades get filled - market orders at the ask or the bid. When there are no more booked orders at those prices change occurs. But, there are times while watching the DOM and TnS the ASK or BID change prices changes and it appears as if nothing has traded. From a market mechanics point of view how do ASK and BID price change?

Perhaps this thread can help

https://futures.io/traders-hideout/39300-liquidity-flipping.html

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Answer
This post has been selected as an answer to the original posters question Answer

Orders are pulled or added. No trading is required for price to fluctuate.

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artemiso View Post
Market makers adjust their bids and offers depending on the fundamental value of the product.

Here is just HFT in action. The fundamental value doesn't change 10,000 times a day. HFT just want to cancel and re-submit virtually all their bid and ask orders every time something is traded at the exchange.

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How do inside bid and ask prices change?

How do inside bid and ask prices change? The inventory of bids or asks at a certain price get added to or pulled. If the inside bid is at, say, 50.25 and all the bids are pulled then the new inside bid is at the next highest bid, say 50.24. Let's say there are 100 bids and 90 get consumed - 90 market sells come in. Then there will be only 10 left. Those 10 could either be consumed by market sell orders or be pulled.

It should be noted that it takes an actual trade at a lower price for the "last" trade to go down on the chart. Time and sales only indicate actual trades. The DOM can, theoretically, move all over the place without trades being made. But in a liquid market it stays centered around current price.

The big boys try to fool people by adding and pulling bids and asks, by showing more (or less) than they actually intend to trade. Deception is part of the game.

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artemiso View Post
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.

Interesting analogy

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