-1

Let's say I'm interested in buying some shares, and I place an order to buy at 80c. At the same time, someone is willing to sell his shares at 40c.

Now I'm told by the bank that they have a best execution policy: i.e. if I want to buy at 80c but it can be bought at a lower price, then the actual price may be lower than what I specified. However, the seller's bank most likely has a similar execution policy.

With that reasoning, although a match is made and the deal may be done, it may be executed at any price between 40c and 80c. How does the stock exchange determine which price to use?

marked as duplicate by Nathan L, Chris W. Rea, Victor, Dheer, BrenBarn Dec 3 '15 at 5:07

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

  • 1
    No it's not. I'm asking specifically what price is used when there is clear overlap between buy and sell prices. – Gigi Dec 2 '15 at 22:14
  • @Gigi did you search for existing answers to your question before you asked it? – Nathan L Dec 2 '15 at 23:08
  • 1
    Assuming there are no other orders, then if 80c buy order hits first [fractions of milliseconds] then the order will be matched with 40c sell and the price for the trade will be 80c. If the 40c sell order hits first and the 80c buy order hits later, the order will be matched and the price will be 40c. – Dheer Dec 3 '15 at 3:30
  • 1
    I think the last-marked duplicate (this one) really is the same as yours. – BrenBarn Dec 3 '15 at 5:07
  • @Dheer thank you so much for being the only one to really answer my question amidst all this madness. – Gigi Dec 3 '15 at 17:20
0

Stock prices are set by bidding. In principle, a seller will say, "I want $80." If he can't find anyone willing to buy at that price, he'll either decide not to sell after all, or he'll lower his price. Likewise, a buyer will say, "I'll pay $70." If he can't find anyone willing to pay that price, he'll either decide not to buy or he'll increase his price. For most stocks there are many buyers and many sellers all the time, so there's a constant interplay.

The typical small investor has VERY little control of the price. You say, "I want to buy 10 shares of XYZ Corporation and my maximum price is $20." If the current trending price is below $20, your broker will buy it for you. If not, he won't. You normally have some time limit on the order, so if the price falls within your range within that time period, your broker will buy. That is, your choice is basically to buy or not buy, or sell or not sell, at the current price. You have little opportunity to really negotiate a better price. If you have a significant percentage of a company's total stock, different story.

In real life, most stocks are being traded constantly, so buyers and sellers both have a pretty good idea of the current price. If the last sale was ten minutes ago for $20, it's unlikely anyone's going to now bid $100. They're going to bid $20.50 or $19.25 or some such. If the last sale was for $20 and your broker really came to the floor and offered to buy for $100, I suppose someone would sell to him very quickly before he realized what an outrageous price this was.

I use TD Ameritrade, and on their web site, if I give a price limit on a buy that's more than a small percentage above the last sale, they reject it as an error. I forget the exact number but they won't even accept a bid of $80 if the stock is going for $40. They might accept $41 or $42, something like that.

  • Thanks, but this doesn't answer the question. I gave a very specific example of a scenario where there is overlap between the buy and sell prices, and would like to know how the price is determined in this case. – Gigi Dec 2 '15 at 22:14
  • Hmm, I thought I did. If you are a typical small investor, if you told your broker you want to buy at a max price of $80, and the current going rate is $70, he will buy at $70. If meanwhile someone else offers to sell for $40, his broker will sell for $70. As small investors, your individual bids have very little effect on the sale price or on each other. Now if you were major investors buying and selling a significant percentage of this company, and if you were the only ones bidding at this time or your quantities swamped all other bids, then I suppose in your scenario whoever quoted a ... – Jay Dec 3 '15 at 7:56
  • ... price first would "lose". But it's a very implausible scenario. In real life both brokers would know the realistic market values, and you'd really be talking about $60.25 versus $60.27, not $40 versus $80. – Jay Dec 3 '15 at 7:59
0

Price is decided by what shares are offered at what prices and who blinks first.

The buyer and seller are both trying to find the best offer, for their definition of best, within the constraints then have set on their bid or ask. The seller will sell to the highest bid they can get that they consider acceptable. The buyer will buy from the lowest offer they can get that they consider acceptable. The price -- and whether a sale/purchase happens at all -- depends on what other trades are still available and how long you're willing to wait for one you're happy with, and may be different on one share than another "at the same time" if the purchase couldn't be completed with the single best offer and had to buy from multiple offers.

This may have been easier to understand in the days of open outcry pit trading, when you could see just how chaotic the process is... but it all boils down to a high-speed version of seeking the best deal in an old-fashioned marketplace where no prices are fixed and every sale requires (or at least offers the opportunity for) negotiation.

"Fred sells it five cents cheaper!" "Then why aren't you buying from him?" "He's out of stock." "Well, when I don't have any, my price is ten cents cheaper." "Maybe I won't buy today, or I'll buy elsewhere. "Maybe I won't sell today. Or maybe someone else will pay my price. Sam looks interested..." "Ok, ok. I can offer two cents more." "Three. Sam looks really interested." "Two and a half, and throw in an apple for Susie." "Done."

And the next buyer or seller starts the whole process over again. Open outcry really is just a way of trying to shop around very, very, very fast, and electronic reconciliation speeds it up even more, but it's conceptually the same process -- either seller gets what they're asking, or they adjust and/or the buyer adjusts until they meet, or everyone agrees that there's no agreement and goes home.

  • In what way does this answer my question? – Gigi Dec 3 '15 at 17:18
  • You asked how the market determines the price. Thus is how the market determines the price. The price you pay when buying -- unless you set limits and standing orders and retry policies -- is the lowest price someone is willing to sell for at that exact moment or when the next share is offered. The price you get when selling -- again in the absence of a more complicated programmed sales strategy -- is your asking price, or the best price available that selects you as the seller within a very short time window, as instructed... or, if your ask is too high and not flexible, no sale happens. – keshlam Dec 3 '15 at 18:16
  • If, as buyer, shares are available are a lower ask than your bid -- and you're the first to agree to pay that price -- you get them cheaper. However, most folks are setting their ask and bid pretty close to the last completed sale, and you're unlikely to be the first to agree to that price, so the odds of your hypothetical situation actually resulting in you getting those discounted shares are vanishingly small. In practical terms, you buy stock at whatever price folks are asking that comes under your bid and that you're fast enough to grab, or everyone waits and hopes for a better offer. – keshlam Dec 3 '15 at 18:25
  • If you're looking for something simpler... sorry, but this is what we've got. – keshlam Dec 3 '15 at 18:27
  • I know how the stock market generally works. I was asking about a specific scenario. – Gigi Dec 3 '15 at 19:10

Not the answer you're looking for? Browse other questions tagged or ask your own question.