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Let's say a Nasdaq stock is trading at $50...

Can a very large (outstanding) BUY LIMIT order at $2.00 pull the stock price down?

Is this a legal/common practice? (I've noticed this being done when reviewing Level II data)?


UPDATE


I see some interesting information. I guess I mis-attributed the cause of the price move..

Here is the full list of observations (since it could helpful)

  • low volume
  • market just closed
  • 30 (x100 shares) SELL LIMIT orders @ $11.30
  • 15 (x100 shares) BUY LIMIT orders @ $11.10

Actions that created a price drop:

  • 10 (x100 shares) BUY LIMIT orders get moved down to $8.00
  • 15 (x100 shares) SELL LIMIT orders immediately move down to $11.12 (before the next candle even forms)
  • Remaining 15 (x100 shares) SELL LIMIT orders also immediately move down to $11.22 (before the next candle forms)
  • Next candle shows a price drop to ~$11.12 (can't remember exact price)
  • 10 (x100 shares) BUY LIMIT immediately moves up to sell at ~$11.12
  • It's unlikely to have any impact. On the other hand, a large buy order at 49.90 may push the price a little higher as some algos are trying to front run the order. – assylias Apr 10 '16 at 18:55
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Traders sometimes look at the depth of the book (number of outstanding limit orders) to try and gauge the sentiment of the market or otherwise use this information to formulate their strategy. If there was a large outstanding buy order at $49.50, there's a decent chance this could increase the price by influencing other traders.

However, a limit order at $2 is like an amazon.com price of $200,000 for a book. It's so far away from realistic that it is ignored. People would think it is an error.

Submitting this type of order is perfectly legal. If the stock is extremely thinly traded, it might even be encouraged because if someone wanted to sell a bunch and did a really bad job of it, the price could conceivably fall that far and the limit order would be adding liquidity. I guess. Your example is pretty extreme.

It is not uncommon for there to be limit orders on the book that are not very close to the trading price. They just sit around. The majority of trades are done by algorithmic traders and institutional traders and they don't tend to do this, but a retail investor may choose to submit an order like that, just hoping against hope.

Also, buy orders are not likely to push prices down, no matter what their price is. A sell order, yes (even if it isn't executed).

  • So by your assessment (based on the updated question context) - An HFT algorithm moving it's SELL LIMIT order down to compensate for a lower AVG BUY LIMIT price possibly caused the price drop, not the actual BUY LIMIT order itself? – Day Trader Apr 10 '16 at 21:46
  • I'm also guessing fooling HFT algos is fair game... very interesting. – Day Trader Apr 10 '16 at 22:01
  • Trying to fool hft is legit, but is extremely unlikely to succeed. Remember, those systems don't assume rational players either. If you insist on trying to play poker against pros, don't complain when you lose. – keshlam Apr 10 '16 at 23:03
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    In a low volume market prices jump around a lot. If there are no transactions, it's hard to know what's going on. Your description seems to assume that traders are looking only at the book, but they may all be reacting to some news outside the market. Looking at a few limit orders and backing out what happened is prone to error. – farnsy Apr 11 '16 at 0:34
  • "Trying to fool HFT" doesn't sound legit to me. Generally from a regulatory perspective you shouldn't be placing any orders to buy or sell things for any reason other than because you have a sincere desire to buy or sell that thing at that price. Placing limit orders that you do not intend to be filled in order to influence prices is called layering, and people get fined huge amounts for it. – Ben Millwood Aug 17 '16 at 17:27
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If an offered price is below what people are willing to sell for, it is simply ignored.

(What happens if I offer to buy lots of cars as long as I only have to pay $2 each? Same thing.)

  • At a high enough volume (50%+ of total market) wouldn't the appearance of low valuation cause uncertainty? If I don't reach the target of $2 as buyer, wouldn't a big enough threat/bluff that a security is overvalued possibly cause a revaluation? – Day Trader Apr 10 '16 at 18:20
  • I think the car analogy doesn't work here because cars have a base value that is independent of what people feel it should cost...stocks (from my understanding) are based on what people are willing to pay... – Day Trader Apr 10 '16 at 18:23
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    @DayTrader The car analogy is fine. The fundamental value of a stock is the present value of all future dividends. Sure, there is uncertainty and disagreement about these dividends and the prospects of the firm, but the same is true for a car. Prices are always what people are willing to pay, but that doesn't mean there is no such thing as fundamental value...we just don't always know it perfectly. – farnsy Apr 10 '16 at 19:12
  • Prices are what people are willing to p pay and what people are willing to accept. Unless an agreement is reached, there is no transaction. If you bid too low I sell to someone else or sell tomorrow, or hold for future sale. – keshlam Apr 11 '16 at 19:58

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