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Lets say we have a fungible asset (stocks, gold, currency, crypto, etc.) that is freely traded on a market. The way this works is that people can submit buy and sell (bid and ask) offers. If a sell offer is below a buy offer, the parties sell to each other. So there's always a gap between the 2 sets like this:

chart

And so it makes sense that the price would be somewhere in this gap. But where exactly?

If we take the middle between the lowest sell offer and the highest buy offer, we essentially give the party behind these offers direct control over the price, like the offer circled in red.

I was thinking since prices are usually sell prices, we take the average of the lowest sell prices that represent a total of N instances of our asset. But now the the price is outside of the set gap and also somewhat useless to sellers.

So how are asset prices with a system like this usually determined?

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    One way is to use the last trade price. You might notice that the price is actually irrelevant, since it's the order price that matters, not the asset price.
    – user253751
    May 12, 2022 at 11:08
  • "we essentially give the party behind these offers direct control over the price" - so? what impact does it have in reality to say the price is one thing or another? It is important to understand this to answer your question - what actual 'impact' of 'determining the price' are you interested in?
    – Grade 'Eh' Bacon
    May 12, 2022 at 14:30
  • @user253751 couldn't a party easily manipulate the market by selling to itself at arbitrary prices?
    – user2741831
    May 13, 2022 at 7:57
  • @Grade 'Eh' Bacon the reason we track prices in the first place is to make decisions based on the prices. If someone can manipulate the price, they can also manipulate our actions. In this case we want to measure the general confidence people have in the underlying asset. So we need an objective way to measure that confidence, in this case how much cold hard cash people are ready to spend on said asset.
    – user2741831
    May 13, 2022 at 8:00
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    You cannot manipulate price in a liquid stock. You can move it with large orders but that's a different creature. In addition, there are hidden orders so analyzing the order book is an inaccurate topical view because it lacks the total amount of order data. And if the security is liquid, you can't manipulate the market by selling to yourself at arbitrary prices - the NBBO quote supersedes that.
    – Bob Baerker
    May 13, 2022 at 10:42

1 Answer 1

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Price is a double-sided market. It's the bid for buyers and the ask for sellers.

A trade occurs when a trader crosses the spread, meaning that a buyer is willing to pay the seller's price (he buys at the ask) or a seller is willing to sell at the bid.

Current fair trading value (not asset value) is the average of the bid and ask prices. It's just a stat and has no relevance for guaranteeing execution. It's merely a way of depicting value as one number rather than double sided with two numbers.

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