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"Fresh Apples here! Only the best apples for 2 dollars!" - "I would like one, please." - "Thatll be 2.50, sir." - "What? I thought you just said 2?" - "Demand h

by noxn 12y ago

"Fresh Apples here! Only the best apples for 2 dollars!" - "I would like one, please." - "Thatll be 2.50, sir." - "What? I thought you just said 2?" - "Demand has just gone up."

harryh 12y ago
That's wrong. It's more like: "Fresh Apples here! Only the best apples for 2 dollars!" - "I would like every single apple you have, please. Also I'm buying all the apples from the guy across the street too." - "Thatll be 2.05 each, sir." - "What? I thought you just said 2?" - "Demand has just gone up."
- TophWells 12y ago
  "Fresh Apples here! Only the best apples for 2 dollars!" "I would like 1000 apples, please." "Sir, I only have 600 apples in the shop. I can give you those now, and I'll ask the guy across the street if he has any." "How much will that cost?" "I think he's also selling them at 2 dollars each. Let me just look - oh, nope, he's seen us talking and changed his sign. Well. Have these 600 at the quoted price, and if you want more you'll have to pay the new price."
  - harryh 12y ago
    Indeed this is even better.
kasey_junk 12y ago
This is the flawed analogy that keeps being propagated that is completely untrue. A much better one is to think of a string of gas stations running down the highway. They all have an advertised price. A tanker truck arrives at the first gas station and buys all the gas at the advertised price. It then goes down the road and buys all the next stations gas at the same advertised price. Then the manager of the 2nd gas station calls the 3rd and says hey, we've just gotten wiped out of gas there is a lot of demand. The 3rd manager raises his price accordingly. The tanker truck can then decide if it wants to buy more gas at the new price or just take what they currently have.
- noxn 12y ago
  Fair enough.
throwaway283719 12y ago
I'm glad you brought this up, because this kind of thing happens precisely never on a financial exchange. If you go to a store, the store owner sees you take your apples up to the counter, and so he can theoretically change his price before you get there (although in practice, if he ever did that he would soon be out of business). On a financial exchange, the market maker doesn't even find out that you wanted to buy until the trade has already happened. It is literally impossible for the market maker to change his price, because he doesn't find out about your order until it's already occurred. What is possible is that the market maker is also quoting on another, totally separate exchange, and he decides to change his prices there, in reaction to seeing a big order on the first exchange. It's like an apple seller who owns two carts in different parts of town. When you come to his first cart and buy all his apples for $2, he guesses that maybe you are going to go over to his second cart and buy all the apples there as well, so he calls his business partner who's running that cart, and tells him to raise his prices to $2.50 - which makes perfect sense as a business strategy, because demand has gone up. Note that he only raised his prices because you bought all the apples at his first cart. If you just bought one apple out of the hundreds he has (because you're a small investor, not a giant investment bank) then he wouldn't bother to raise his prices.
- noxn 12y ago
  I accept that your explanation makes sense, but the fact that this can happen automagically in an intransparent way when someone just wants to buy a number of shares at a quoted price just feels wrong. And reading a few other articles on Nanex also give me weird image of what happens in stocks in general. Then again, I have no idea about these things and should probably shut up.
  - throwaway283719 12y ago
    Just remember that when you say "someone wants to buy a number of shares at a quoted price" what you really mean is "a giant investment bank or hedge fund with some privileged information about a stock wants to buy so many shares that they actually need to go to multiple exchanges to satisfy their demand" and you'll be all set ;)

by noxn 12y ago

"Fresh Apples here! Only the best apples for 2 dollars!" - "I would like one, please." - "Thatll be 2.50, sir." - "What? I thought you just said 2?" - "Demand has just gone up."

harryh 12y ago

That's wrong. It's more like: "Fresh Apples here! Only the best apples for 2 dollars!" - "I would like every single apple you have, please. Also I'm buying all the apples from the guy across the street too." - "Thatll be 2.05 each, sir." - "What? I thought you just said 2?" - "Demand has just gone up."

TophWells 12y ago
"Fresh Apples here! Only the best apples for 2 dollars!" "I would like 1000 apples, please." "Sir, I only have 600 apples in the shop. I can give you those now, and I'll ask the guy across the street if he has any." "How much will that cost?" "I think he's also selling them at 2 dollars each. Let me just look - oh, nope, he's seen us talking and changed his sign. Well. Have these 600 at the quoted price, and if you want more you'll have to pay the new price."
- harryh 12y ago
  Indeed this is even better.

kasey_junk 12y ago

This is the flawed analogy that keeps being propagated that is completely untrue. A much better one is to think of a string of gas stations running down the highway. They all have an advertised price. A tanker truck arrives at the first gas station and buys all the gas at the advertised price. It then goes down the road and buys all the next stations gas at the same advertised price. Then the manager of the 2nd gas station calls the 3rd and says hey, we've just gotten wiped out of gas there is a lot of demand. The 3rd manager raises his price accordingly. The tanker truck can then decide if it wants to buy more gas at the new price or just take what they currently have.

noxn 12y ago
Fair enough.

throwaway283719 12y ago

I'm glad you brought this up, because this kind of thing happens precisely never on a financial exchange. If you go to a store, the store owner sees you take your apples up to the counter, and so he can theoretically change his price before you get there (although in practice, if he ever did that he would soon be out of business). On a financial exchange, the market maker doesn't even find out that you wanted to buy until the trade has already happened. It is literally impossible for the market maker to change his price, because he doesn't find out about your order until it's already occurred. What is possible is that the market maker is also quoting on another, totally separate exchange, and he decides to change his prices there, in reaction to seeing a big order on the first exchange. It's like an apple seller who owns two carts in different parts of town. When you come to his first cart and buy all his apples for $2, he guesses that maybe you are going to go over to his second cart and buy all the apples there as well, so he calls his business partner who's running that cart, and tells him to raise his prices to $2.50 - which makes perfect sense as a business strategy, because demand has gone up. Note that he only raised his prices because you bought all the apples at his first cart. If you just bought one apple out of the hundreds he has (because you're a small investor, not a giant investment bank) then he wouldn't bother to raise his prices.

noxn 12y ago
I accept that your explanation makes sense, but the fact that this can happen automagically in an intransparent way when someone just wants to buy a number of shares at a quoted price just feels wrong. And reading a few other articles on Nanex also give me weird image of what happens in stocks in general. Then again, I have no idea about these things and should probably shut up.
- throwaway283719 12y ago
  Just remember that when you say "someone wants to buy a number of shares at a quoted price" what you really mean is "a giant investment bank or hedge fund with some privileged information about a stock wants to buy so many shares that they actually need to go to multiple exchanges to satisfy their demand" and you'll be all set ;)