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The notion of “share price” is something I haven’t ever really understood. As I understand it, if four people are queueing up to buy stock A for [$10, $9, $8,

The notion of “share price” is something I haven’t ever really understood. As I understand it, if four people are queueing up to buy stock A for [$10, $9, $8, $7] and four other people are in line to sell for [$10, $11, $12, $13] then the people at the front match up and swap one unit of stock for $10, and the stock exchange lists A as being last valued at $10. Stock B’s order books have four buyers at [$10, $1, $1, $1] and four sellers as [$10, $99, $99, $99]. Again the matching buyer and seller exchange $10 for one unit of stock, the exchange shows B on its ticker for $10, and we say that company A and company B have the same value. B’s future looks a lot more bleak. Buyers say it’s a junk stock, only worth a dollar. Sellers claim the company is way under-valued: you need the best part of a hundred dollars to convince them to give up their share. People say these things in real life — retail investor blogs, Mad Money, fund forecasts etc. — but those are just words compared to actual buy/sell orders. Do exchanges give us insight into what their order books actually look like, instead of just quoting the last price where a buyer and seller matched? I want this problem to be symmetric in such a way that A and B truly do have the same value, as shown by the market, but something about the $1 buy price for B feels more important than the $99 sell price. I think it’s because buyers have actual dollars — the things we need to buy food and shelter — so what they say is more important than what B’s snake-oil stock-sales people claim.

deleted 4y ago
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lotsofpulp 4y ago
> I want this problem to be symmetric in such a way that A and B truly do have the same value That is why you also have to look at volume.
rozenmd 4y ago
In the short term, the exchanges tell us how popular a share is, based on hype, trades, etc. In the long term, over several years, the stock price vaguely follows the value of a company (depending on the exchange - back in Australia you could discover "sure things" a year before the rest of the market was paying attention)
hhmc 4y ago
There’s a few things wrong with this: 1. For anything remotely liquid, the order book won’t look like this for various reasons. 2. Except at very high frequency time scales there are more robust measures of price that are typically used: e.g. VWAP over some interval (this would be ~$10 in your example), or the clearing price of the closing auction, etc
halflings 4y ago
The scenario you gave is very unlikely for stocks with large trading volume like TSLA. The spread is nowhere near that wide, and if it was market makers would make a profit out of that.
hackerlight 4y ago
Resting liquidity far away from the best bid offer is close to meaningless. The last traded price contains almost all the relevant information from the microstructure. You can get an additional 0.03 percent notional of pricing information by looking at the what you're talking about.
repsilat 4y ago
> Do exchanges give us insight into what their order books actually look like, instead of just quoting the last price where a buyer and seller matched? They do. I haven't seen depth info past the best bid/offer (maybe exists? I'm not an expert), but I see the bid and ask prices with sizes in my broker's app in realtime. "Last price" is just one useful bit of information. The theory behind showing the last price is that an actual matched transaction feels less likely to be "wrong" (over short periods) than bid/ask in illiquid cases. Sometimes there really just aren't people on one side ready to buy/sell, and the ”$1 $1 $1” would say something less realistic, not more. Good question though, dunno why anyone would downvote.
- clappski 4y ago
  > haven't seen depth info past the best bid/offer (maybe exists? I'm not an expert) Most exchanges will provide arbitrary depth in way of a pure order feed. From that you can construct your price book, which gives you the levels of depth. Some just expose the price book, some price book and order feed, some just order feed. Some anonymize the order feed, some don't (I think typically in equities it's anonymized although not my asset class, but other markets e.g. power need to be de-anonymized and you can see the other buyers and sellers submissions). However, that data doesn't represent the market price - I would look to constructing the fair price using the trades made on the exchange rather than the outstanding orders. From that you can create different lenses to view the fair price - e.g. volume weighted, time weighted, other types of averages.

deleted 4y ago

[deleted]

lotsofpulp 4y ago

> I want this problem to be symmetric in such a way that A and B truly do have the same value That is why you also have to look at volume.

rozenmd 4y ago

In the short term, the exchanges tell us how popular a share is, based on hype, trades, etc. In the long term, over several years, the stock price vaguely follows the value of a company (depending on the exchange - back in Australia you could discover "sure things" a year before the rest of the market was paying attention)

hhmc 4y ago

There’s a few things wrong with this: 1. For anything remotely liquid, the order book won’t look like this for various reasons. 2. Except at very high frequency time scales there are more robust measures of price that are typically used: e.g. VWAP over some interval (this would be ~$10 in your example), or the clearing price of the closing auction, etc

halflings 4y ago

The scenario you gave is very unlikely for stocks with large trading volume like TSLA. The spread is nowhere near that wide, and if it was market makers would make a profit out of that.

hackerlight 4y ago

Resting liquidity far away from the best bid offer is close to meaningless. The last traded price contains almost all the relevant information from the microstructure. You can get an additional 0.03 percent notional of pricing information by looking at the what you're talking about.

repsilat 4y ago

> Do exchanges give us insight into what their order books actually look like, instead of just quoting the last price where a buyer and seller matched? They do. I haven't seen depth info past the best bid/offer (maybe exists? I'm not an expert), but I see the bid and ask prices with sizes in my broker's app in realtime. "Last price" is just one useful bit of information. The theory behind showing the last price is that an actual matched transaction feels less likely to be "wrong" (over short periods) than bid/ask in illiquid cases. Sometimes there really just aren't people on one side ready to buy/sell, and the ”$1 $1 $1” would say something less realistic, not more. Good question though, dunno why anyone would downvote.

clappski 4y ago
> haven't seen depth info past the best bid/offer (maybe exists? I'm not an expert) Most exchanges will provide arbitrary depth in way of a pure order feed. From that you can construct your price book, which gives you the levels of depth. Some just expose the price book, some price book and order feed, some just order feed. Some anonymize the order feed, some don't (I think typically in equities it's anonymized although not my asset class, but other markets e.g. power need to be de-anonymized and you can see the other buyers and sellers submissions). However, that data doesn't represent the market price - I would look to constructing the fair price using the trades made on the exchange rather than the outstanding orders. From that you can create different lenses to view the fair price - e.g. volume weighted, time weighted, other types of averages.