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A
stock was up today. A stock was down today. A stock was unchanged
today. |
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Background: |
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Each day the market
reports each stock's price has changed. It is either up, down, or unchanged. These
reports are rarely if ever considered anything other than simply factual.
These reports are accepted without question as absolute fact. |
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Each price move is
assumed to be based directly upon buy and sell pressure. Each price
move is assumed to be an instantaneous measure of relative buy
pressure and sell pressure. Buy and sell pressures are forces. They
should be considered vectors since they have direction and
magnitude. The balance between the buy and sell forces net out to
price change at any given instance. |
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The image of the specialist's book with
its price points and volumes at various price points must be
considered. The price at any given instant is theoretically
determined by those volumes at near-in price points. |
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At any given instant
the volumes at each price point are static. They remain fixed
until a buy and sell order or orders is/are executed by matching the two
sides. Additionally, the order book remains static until a buy or sell order
is removed or added to the book. |
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Matching of order
quantities at specific prices results in a new price which may be
the same as the last price, or it may be higher or lower than the last
price. The execution of an order -- the matching of buy and sell
orders -- results in a change in the order book. |
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A Question: |
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Imagine the
specialist's book for one highly-liquid, large-float stock. The
specialist's book
contains buy and sell orders at strike prices above and below the
last price match. |
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What will the next match price be? That
is, at what price will the next execution be? |
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Required Action: |
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In order to answer this question, the
specialist
must act upon the open buy and sell orders at near-in prices. These
orders must be aggregated and matched to satisfy the buyer(s) and
seller(s). |
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The Ultimate Question: |
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In a manual
specialist system, what determines if & when the specialist will
enter the match process to add or remove shares of stock from his own inventory in order
to affect the buy-sell? What determines if & when the specialist
will not enter the match process, and instead, wait and accept buy
and sell orders as they congeal at a future moment? What procedural
obligations does a specialist have to enter the match process with
his own inventory through his buying or selling to affect the match? |
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In an automated
match system, what design considerations determined how the system
was programmed to reach upward and downward grabbing orders to match
and complete the execution? |
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If the specialist or
automated system decides to not enter the matching process, he or it
will impact the match process. If he / it decide to enter the
matching process, the price will be impacted. These impacts will be
directly reflected in the execution price. |
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This is why this
question has meaning. |
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Impact Note: In both a manual specialist book and an
automated system, the entity controlling the match process
determines to a degree whether or not it will make a profit or a
loss on the trade. |
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The next time you hear that a stock was
up, down, or unchanged, you will know how to interpret the movement
-- now that you have answered this question. |
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Ask yourself the
ultimate question above. Ask anyone you know who is knowledgeable in
markets. Do you get anything other than a blank stare? |
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Context Limit: |
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Stock and other liquid markets do not
operate in fashions similar to thin markets or markets for unique items, such as
real estate and antiques. Each of these is appropriate for analyses
specific to the market mover and supply-demand nature of limited,
non-fungible markets. |
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The above analysis applies to highly liquid
markets trading perfectly fungible items, such as stocks and some bonds
and commodities to varying market dynamics at various times, but not
at all times. |