Market trend

A market trend is a perceived tendency of financial markets to move in a particular direction over time.[1] These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames.[2] Traders attempt to identify market trends using technical analysis, a framework which characterizes market trends as predictable price tendencies within the market when price reaches support and resistance levels, varying over time.

A trend can only be determined in hindsight, since at any time prices in the future are not known.

Contents

  • 1 Market terminology
  • 2 Secular trends
  • 3 Primary trends

    • 3.1 Bull market

      • 3.1.1 Examples
    • 3.2 Bear market

      • 3.2.1 Examples
    • 3.3 Market top

      • 3.3.1 Examples
    • 3.4 Market bottom

      • 3.4.1 Examples
  • 4 Secondary trends
  • 5 Causes
  • 6 Investor sentiment
  • 7 See also
  • 8 References
  • 9 External links

Market terminology

The terms “bull market” and “bear market” describe upward and downward market trends, respectively,[3] and can be used to describe either the market as a whole or specific sectors and securities.[2] The names perhaps correspond to the fact that a bull attacks by lifting its horns upward, while a bear strikes with its claws in a downward motion.[1][4]

Secular trends

A secular market trend is a long-term trend that lasts 5 to 25 years and consists of a series of primary trends. A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets.

In a secular bull market the prevailing trend is “bullish” or upward-moving. The United States stock market was described as being in a secular bull market from about 1983 to 2000 (or 2007), with brief upsets including the crash of 1987 and the market collapse of 2000–2002 triggered by the dot-com bubble.

In a secular bear market, the prevailing trend is “bearish” or downward-moving. An example of a secular bear market occurred in gold between January 1980 to June 1999, culminating with the Brown Bottom. During this period the market gold price fell from a high of $850/oz ($30/g) to a low of $253/oz ($9/g);[5] this was part of the Great Commodities Depression.

Primary trends

Statues of the two symbolic beasts of finance, the bear and the bull, in front of the Frankfurt Stock Exchange.

A primary trend has broad support throughout the entire market (most sectors) and lasts for a year or more.

Bull market

A 1901 cartoon depicting financier J. P. Morgan as a bull with eager investors

A bull market is a period of generally rising prices. The start of a bull market is marked by widespread pessimism. This point is when the “crowd” is the most “bearish”.[6] The feeling of despondency changes to hope, “optimism”, and eventually euphoria, as the bull runs its course.[7] This often leads the economic cycle, for example in a full recession, or earlier.

An analysis of Morningstar, Inc. stock market data from 1926 to 2014 found that a typical bull market “lasted 8.5 years
with an average cumulative total return of 458%”, while annualized gains for bull markets range from 14.9% to 34.1%.[8]

Examples

India’s Bombay Stock Exchange Index, BSE SENSEX, had a major bull market trend for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points, more than a 600% return in 5 years.[citation needed]
Notable bull markets marked the 1925–1929, 1953–1957 and the 1993–1997 periods when the U.S. and many other stock markets rose; while the first period ended abruptly with the start of the Great Depression, the end of the later time periods were mostly periods of soft landing, which became large bear markets. (see: Recession of 1960–61 and the dot-com bubble in 2000–2001)

Bear market

A bear market is a general decline in the stock market over a period of time.[9] It is a transition from high investor optimism to widespread investor fear and pessimism. According to The Vanguard Group, “While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period.”[10]

A smaller decline of 10 to 20% is considered a correction. Once a market enters correction or bear market territory, it isn’t considered to have exited that territory until a new high is reached.[11]

An analysis of Morningstar, Inc. stock market data from 1926 to 2014 found that a typical bear market “lasted 1.3 years
with an average cumulative loss of −41%”, while annualized declines for bear markets range from −19.7% to −47%.[12]

Examples

A bear market followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of the Dow Jones Industrial Average’s market capitalization by July 1932, marking the start of the Great Depression. After regaining nearly 50% of its losses, a longer bear market from 1937 to 1942 occurred in which the market was again cut in half. Another long-term bear market occurred from about 1973 to 1982, encompassing the 1970s energy crisis and the high unemployment of the early 1980s. Yet another bear market occurred between March 2000 and October 2002. Recent examples occurred between October 2007 and March 2009, as a result of the financial crisis of 2007–2008. See also 2015 Chinese stock market crash.

Market top

A market top (or market high) is usually not a dramatic event. The market has simply reached the highest point that it will, for some time (usually a few years). It is identified retrospectively, as market participants are not aware of it at the time it happens. Thus prices subsequently fall, either slowly or more rapidly.

William J. O’Neil and company report that since the 1950s a market top is characterized by three to five distribution days in a major market index occurring within a relatively short period of time. Distribution is a decline in price with higher volume than the preceding session.

Examples

The peak of the dot-com bubble (as measured by the NASDAQ-100) occurred on March 24, 2000. The index closed at 4,704.73. The Nasdaq peaked at 5,132.50 and the S&P 500 at 1525.20.

A recent peak for the broad U.S. market was October 9, 2007. The S&P 500 index closed at 1,565 and the Nasdaq at 2861.50.

Market bottom

A market bottom is a trend reversal, the end of a market downturn, and the beginning of an upward moving trend (bull market).

It is very difficult to identify a bottom (referred to by investors as “bottom picking”) while it is occurring. The upturn following a decline is often short-lived and prices might resume their decline. This would bring a loss for the investor who purchased stock(s) during a misperceived or “false” market bottom.

Baron Rothschild is said to have advised that the best time to buy is when there is “blood in the streets”, i.e., when the markets have fallen drastically and investor sentiment is extremely negative.[13]

Examples

Some examples of market bottoms, in terms of the closing values of the Dow Jones Industrial Average (DJIA) include:

  • The Dow Jones Industrial Average hit a bottom at 1738.74 on 19 October 1987, as a result of the decline from 2722.41 on 25 August 1987. This day was called Black Monday (chart[14]).
  • A bottom of 7286.27 was reached on the DJIA on 9 October 2002 as a result of the decline from 11722.98 on 14 January 2000. This included an intermediate bottom of 8235.81 on 21 September 2001 (a 14% change from 10 September) which led to an intermediate top of 10635.25 on 19 March 2002 (chart[15]). The “tech-heavy” Nasdaq fell a more precipitous 79% from its 5132 peak (10 March 2000) to its 1108 bottom (10 October 2002).
  • A bottom of 6,440.08 (DJIA) on 9 March 2009 was reached after a decline associated with the subprime mortgage crisis starting at 14164.41 on 9 October 2007 (chart[16]).

Secondary trends

Secondary trends are short-term changes in price direction within a primary trend. They may last for a few weeks or a few months.

A short-term change like this may at the time be called a market correction. A correction is a short-term price decline of 5% to 20% or so.[17] An example occurred from April to June 2010, when the S&P 500 went from above 1200 to near 1000. Some said this was the end of the bull market and start of a bear market, but it was not, and the market turned back up. A correction is a downward movement that is not large enough to be a bear market (ex post).

Similarly, a bear market rally (sometimes called “sucker’s rally” or “dead cat bounce”) is a price increase of 10% or 20% or so before prices fall again.[18] Bear market rallies occurred in the Dow Jones index after the 1929 stock market crash, leading down to the market bottom in 1932, and throughout the late 1960s and early 1970s. The Japanese Nikkei 225 has tracked a number of bear-market rallies since the late 1980s while experiencing an overall long-term downward trend.

Causes

The price of assets such as stocks is set by supply and demand. By definition, the market balances buyers and sellers, so it is impossible to have “more buyers than sellers” or vice versa, although that is a common expression. In a surge in demand, the buyers will increase the price they are willing to pay, while the sellers will increase the price they wish to receive. In a surge in supply, the opposite happens.

Supply and demand are varied when investors try to shift allocation of their investments between asset types. For example, at one time, investors may wish to move money from government bonds to “tech” stocks, but they will only succeed if somebody else is willing to buy government bonds from them; at another time, they may try to move money from “tech” stocks to government bonds. In each case, this will affect the price of both types of assets.

Ideally, investors would wish to buy low and sell high, but they may end up buying high and selling low.[19] Contrarian investors and traders attempt to “fade” the investors’ actions (buy when they are selling, sell when they are buying). A time when most investors are selling stocks is known as distribution, while a time when most investors are buying stocks is known as accumulation.

According to standard theory, a decrease in price will result in less supply and more demand, while an increase in price will do the opposite. This works well for most assets but it often works in reverse for stocks due to the mistake many investors make of buying high in a state of euphoria and selling low in a state of fear or panic as a result of the herding instinct. In case an increase in price causes an increase in demand, or a decrease in price causes an increase in supply, this destroys the expected negative feedback loop and prices will be unstable.[20] This can be seen in a bubble or crash.

Investor sentiment

Investor sentiment is a contrarian stock market indicator.

When a high proportion of investors express a bearish (negative) sentiment, some analysts consider it to be a strong signal that a market bottom may be near. The predictive capability of such a signal (see also market sentiment) is thought to be highest when investor sentiment reaches extreme values.[21] Indicators that measure investor sentiment may include:[citation needed]

David Hirshleifer sees in the trend phenomenon a path starting with underreaction and ending in overreaction by investors / traders.

  • Investor Intelligence Sentiment Index: If the Bull-Bear spread (% of Bulls − % of Bears) is close to a historic low, it may signal a bottom. Typically, the number of bears surveyed would exceed the number of bulls. However, if the number of bulls is at an extreme high and the number of bears is at an extreme low, historically, a market top may have occurred or is close to occurring. This contrarian measure is more reliable for its coincidental timing at market lows than tops.
  • American Association of Individual Investors (AAII) sentiment indicator: Many feel that the majority of the decline has already occurred once this indicator gives a reading of minus 15% or below.
  • Other sentiment indicators include the Nova-Ursa ratio, the Short Interest/Total Market Float, and the put/call ratio.

See also

  • Mr. Market
  • Black Monday
  • Bull-bear line
  • Business cycle
  • Don’t fight the tape
  • Trend following
  • Recession
  • Economic expansion
  • Market sentiment
  • Animal spirits
  • Herd mentality
  • Real estate trends

References

  1. ^ ab George Fontanills, Tommy Gentile (2001). The Stock Market Course. John Wiley and Sons Inc. p. 91..mw-parser-output cite.citation{font-style:inherit}.mw-parser-output .citation q{quotes:”””””””‘””‘”}.mw-parser-output .citation .cs1-lock-free a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/6/65/Lock-green.svg/9px-Lock-green.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .citation .cs1-lock-limited a,.mw-parser-output .citation .cs1-lock-registration a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/d/d6/Lock-gray-alt-2.svg/9px-Lock-gray-alt-2.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .citation .cs1-lock-subscription a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/a/aa/Lock-red-alt-2.svg/9px-Lock-red-alt-2.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration{color:#555}.mw-parser-output .cs1-subscription span,.mw-parser-output .cs1-registration span{border-bottom:1px dotted;cursor:help}.mw-parser-output .cs1-ws-icon a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/4/4c/Wikisource-logo.svg/12px-Wikisource-logo.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output code.cs1-code{color:inherit;background:inherit;border:inherit;padding:inherit}.mw-parser-output .cs1-hidden-error{display:none;font-size:100%}.mw-parser-output .cs1-visible-error{font-size:100%}.mw-parser-output .cs1-maint{display:none;color:#33aa33;margin-left:0.3em}.mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration,.mw-parser-output .cs1-format{font-size:95%}.mw-parser-output .cs1-kern-left,.mw-parser-output .cs1-kern-wl-left{padding-left:0.2em}.mw-parser-output .cs1-kern-right,.mw-parser-output .cs1-kern-wl-right{padding-right:0.2em}
  2. ^ ab Edwards, R.; McGee, J.; Bessetti, W. H. C. (2007). Technical Analysis of Stock Trends. CRC Press. ISBN 978-0-8493-3772-7.
  3. ^ Preis, Tobias; Stanley, H. Eugene (2011). “Bubble trouble: Can a Law Describe Bubbles and Crashes in Financial Markets?”. Physics World. 24: 29–32.
  4. ^ “Bull Market”. Retrieved 2016-02-21.
  5. ^ Chart of gold 1968–99
  6. ^ Winning on Wall Street Martin Zweig
  7. ^ The 6 Stages Of Bull Markets — And Where We Are Right Now | Markets | Minyanville’s Wall Street Minyanville
  8. ^ “History of U.S. Bear and Bull Markets Since 1926 Archived 2016-05-09 at the Wayback Machine”, chart by First Trust Portfolios L.P., accessed 01 May 2016
  9. ^ O’Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in Action. Pearson Prentice Hall. p. 290. ISBN 0-13-063085-3.
  10. ^ “Staying calm during a bear market Archived 2011-07-17 at the Wayback Machine”. Vanguard Group.
  11. ^ Mark DeCambre (April 6, 2018). “Stop saying the Dow is moving in and out of correction! That is not how stock-market moves work”. MarketWatch. Retrieved April 23, 2018.
  12. ^ “History of U.S. Bear and Bull Markets Since 1926 Archived 2016-05-09 at the Wayback Machine”, chart by First Trust Portfolios L.P., accessed 01 May 2016
  13. ^ Buy When There’s Blood in the Streets
  14. ^ stockcharts.com chart
  15. ^ stockcharts.com chart
  16. ^ “$INDU – SharpCharts Workbench”. StockCharts.com. Retrieved 2014-05-30.
  17. ^ Technical Analysis of Stock Trends, Robert D. Edwards and John Magee p. 479.
  18. ^ “Bear Market Rally Definition”. Investopedia.
  19. ^ Bad Timing Eats Away at Investor Returns
  20. ^ Wilcox, Jarrod W.; Fabozzi, Frank J. Financial Advice and Investment Decisions: A Manifesto for Change.
  21. ^ Trying to Plumb a Bottom, By MARK HULBERT, http://online.barrons.com/article/SB122652105098621685.html

External links

  • Market trend definition, explanations, and examples provided in simple terms
  • Description and Charts of Trend Indicators


Risk arbitrage

Risk arbitrage, also known as merger arbitrage, is an investment strategy that speculates on the successful completion of mergers and acquisitions. An investor that employs this strategy is known as an arbitrageur. Risk arbitrage is a type of event-driven investing in that it attempts to exploit pricing inefficiencies caused by a corporate event.[1]

Contents

  • 1 Basics

    • 1.1 Cash mergers
    • 1.2 Stock mergers
  • 2 Risk-return profile

    • 2.1 Risks
    • 2.2 Predictors of success
    • 2.3 Active vs. passive
    • 2.4 Returns
    • 2.5 Market risk
  • 3 Example
  • 4 References
  • 5 External links

Basics

A merger begins when one company, the acquirer, makes an offer to purchase the shares of another company, the target. As compensation, the target will receive cash at a specified price, the acquirer’s stock at specified ratio, or a combination of the two.

Cash mergers

In a cash merger, the acquirer offers to purchase the shares of the target for a certain price in cash. The target’s stock price will most likely increase when the acquirer makes the offer, but the stock price will remain below the offer value.[1] In some cases, the target’s stock price will increase to a level above the offer price. This would indicate that investors expect that a higher bid could be coming for the target, either from the acquirer or from a third party.[2] To initiate a position, the arbitrageur will buy the target’s stock. The arbitrageur makes a profit when the target’s stock price approaches the offer price, which will occur when the likelihood of deal consummation increases. The target’s stock price will be equal to the offer price upon deal completion.

Stock mergers

In a stock merger, the acquirer offers to purchase the target by exchanging its own stock for the target’s stock at a specified ratio. To initiate a position, the arbitrageur will buy the target’s stock and short sell the acquirer’s stock.[1] This process is called “setting a spread”. The size of the spread positively correlates to the perceived risk that the deal will not be consummated at its original terms.[2] The arbitrageur makes a profit when the spread narrows, which occurs when deal consummation appears more likely. Upon deal completion, the target’s stock will be converted into stock of the acquirer based on the exchange ratio determined by the merger agreement. At this point in time, the spread will close. The arbitrageur delivers the converted stock into his short position to close his position.

Risk-return profile

The risk-return profile in risk arbitrage is relatively asymmetric. There is typically a far greater downside if the deal breaks than there is upside if the deal is completed.[2]

Risks

This strategy is not risk-free. Risk arbitrage profits materialize through the narrowing of the spread, which exists as a result of the risk that the merger will not be consummated at its original terms. Risk arises from the possibility of deals failing to go through or not being consumated within the timeframe originally indicated. The risk arbitrageur must be aware of the risks that threaten both the original terms and the ultimate consummation of the deal. These risks include price cuts, deal extension risk[3] and deal termination. A price cut would lower the offer value of the target’s shares, and the arbitrageur could end up with a net loss even if the merger is consummated. An unexpected extension to the deal completion timeframe lowers the expected annualized return which in turn causes a decline in the stock to compensate assuming the probability of the deal completing remains constant. However, the majority of mergers and acquisitions are not revised.[4] Therefore, the arbitrageur need only concern himself with the question of whether the deal will be consummated according to its original terms or terminated.[4] Deal termination can occur for many reasons. These reasons may include either party’s inability to satisfy conditions of the merger, a failure to obtain the requisite shareholder approval, failure to receive antitrust and other regulatory clearances, or some other event which may change the target’s or the acquirer’s willingness to consummate the transaction.[5] Such possibilities put the risk in the term risk arbitrage.

Additional complications can arise on a deal-by-deal basis. An example includes collars. A collar occurs in a stock-for-stock merger, where the exchange ratio is not constant but changes with the price of the acquirer. Arbitrageurs use options-based models to value deals with collars. The exchange ratio is commonly determined by taking the average of the acquirer’s closing price over a period of time (typically 10 trading days prior to close), during which time the arbitrageur would actively hedge his position in order to ensure the correct hedge ratio.

A 2010 study of 2,182 mergers between 1990 and 2007 experienced a break rate of 8.0%.[6] A study conducted by Baker and Savasoglu, which replicated a diversified risk arbitrage portfolio containing 1,901 mergers between 1981 and 1996, experienced a break rate of 22.7%.[4] The arbitrageur can expect, on average, one or two deals out of ten to break.

Predictors of success

Baker and Savasoglu contend that the best single predictor of merger success is hostility: only 38% of hostile deals were successfully consummated, while so-called friendly deals boasted a success rate of 82%.[4] Cornelli and Li contend that arbitrageurs are actually the most important element in determining the success of a merger. Since arbitrageurs have made significant financial bets that the merger will go through, it is expected that they will push for consummation. For this very reason, the probability that the merger will consummate increases as arbitrageur control increases.[7] In their study, Cornelli and Li found that the arbitrage industry would hold as much as 30%-40% of a target’s stock during the merger process. This represents a significant portion of the shares required to vote yes to deal consummation in most mergers. Thus, takeovers in which arbitrageurs bought shares had an actual success rate higher than the average probability of success implied by market prices.[7] As a result, they can generate substantial positive returns on their portfolio positions.

Active vs. passive

The arbitrageur can generate returns either actively or passively. Active arbitrageurs purchase enough stock in the target to control the outcome of the merger. These activist investors initiate sales processes or hold back support from ongoing mergers in attempts to solicit a higher bid. On the other end of the spectrum, passive arbitrageurs do not influence the outcome of the merger.[8] One set of passive arbitrageurs invests in deals that the market expects to succeed and increases holdings if the probability of success improves.[8] The other set of passive arbitrageurs is more involved, but passive nonetheless: these arbitrageurs are more selective with their investments, meticulously testing assumptions on the risk-reward profile of individual deals. This set of arbitrageurs will invest in deals in which they conclude that the probability of success is greater than what the spread implies.[8] Passive arbitrageurs have more freedom in very liquid stocks: the more liquid the target stock, the better risk arbitrageurs can hide their trade.[7] In this case, using the assumption that a higher arbitrageur presence increases the probability of consummation, the share price will not fully reflect the increased probability of success and the risk arbitrageur can buy shares and make a profit.[7] The arbitrageur must decide whether an active role or a passive role in the merger is the more attractive option in a given situation.

Returns

Risk arbitrage generates stable returns with minimal impact from market influences.[2] In the long run, risk arbitrage does appear to generate stable returns. Baker and Savasoglu replicated a diversified risk arbitrage portfolio containing 1,901 mergers between 1981 and 1996; the portfolio generated excess annualized returns of 9.6%.[4] Maheswaran and Yeoh examined the risk-adjusted profitability of merger arbitrage in Australia using a sample of 193 bids from January 1991 to April 2000; the portfolio returned 0.84% to 1.20% per month.[9] Mitchell and Pulvino used a sample of 4,750 offers between 1963 and 1998 to characterize the risk and return in risk arbitrage; the portfolio generated annualized returns of 6.2%.[10] The analyses also show that merger arbitrage is significantly constrained by transaction costs.[9] Arbitrageurs could generate abnormally high returns using this strategy, but the frequency and high cost of trades negate most of the profits. In general, these examples support the notion that risk arbitrage generates steady returns over the long term. However, the arbitrageur must be aware of massive asymmetrical short-term losses that may arise when a deal is terminated. Individual deal spreads can widen to more than fifty percent in broken deals. The HFRI Merger Arbitrage Index posted a maximum one-month loss of -6.46% but a maximum one-month gain of only 2.90% from 1990 to 2005.[2] Therefore, the arbitrageur must be able to stomach the occasional short-term pain to enjoy the long-term profits.

Market risk

Demeter’s statement that risk arbitrage experiences minimal impact from market influences is up for debate. The correlation between portfolio returns and market returns is measured by beta. A portfolio’s beta can fall between negative one and positive one: a beta of negative one signifies a perfect negative correlation with the market, a beta of positive one signifies a perfect positive correlation with the market, and a beta of zero signifies no market influence on the portfolio. Demeter’s statement suggests that the beta of a risk arbitrage portfolio should be close to zero. Most findings also support the notion that risk arbitrage experiences very little beta in most market environments.[10][9] However, in market downturns where the stock market experiences a decrease of 4% or more, the correlation between merger arbitrage returns and risk arbitrage returns increases to 0.5.[10] This finding suggests that there is, in fact, systematic risk that asymmetrically hurts arbitrageurs. The arbitrageur would not participate in market rallies, but would go down with the ship when the market cracks.

Example

Suppose Company A is trading at $40 a share. Then Company X announces a plan to buy Company A, in which case holders of Company A’s stock get $80 in cash. Then Company A’s stock jumps to $70. It does not go to $80 since there is some chance the deal will not go through.

In this case, the arbitrageur can purchase shares of Company A’s stock for $70. He will gain $10 if the deal is completed and lose $30 if the deal is terminated (assuming the stock returns to its original $40 in a break, which may not occur). According to the market, the probability that the deal is consummated at its original terms is 75% and the probability that the deal will be terminated is 25%. The arbitrageur has three choices:

  1. Purchase Company A’s stock at $70. He would do this if he believes the probability that the deal will close is higher than or in-line with the odds offered by the market.
  2. Short sell Company A’s stock at $70. He would do this if he believes the probability that the deal will be terminated is higher than the odds offered by the market.
  3. Do not get involved in the deal at this point in time.

References

  1. ^ abc “Hedge Fund Merger Arbitrage Strategy | Hedge Fund Education”. www.barclayhedge.com..mw-parser-output cite.citation{font-style:inherit}.mw-parser-output .citation q{quotes:”””””””‘””‘”}.mw-parser-output .citation .cs1-lock-free a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/6/65/Lock-green.svg/9px-Lock-green.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .citation .cs1-lock-limited a,.mw-parser-output .citation .cs1-lock-registration a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/d/d6/Lock-gray-alt-2.svg/9px-Lock-gray-alt-2.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .citation .cs1-lock-subscription a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/a/aa/Lock-red-alt-2.svg/9px-Lock-red-alt-2.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration{color:#555}.mw-parser-output .cs1-subscription span,.mw-parser-output .cs1-registration span{border-bottom:1px dotted;cursor:help}.mw-parser-output .cs1-ws-icon a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/4/4c/Wikisource-logo.svg/12px-Wikisource-logo.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output code.cs1-code{color:inherit;background:inherit;border:inherit;padding:inherit}.mw-parser-output .cs1-hidden-error{display:none;font-size:100%}.mw-parser-output .cs1-visible-error{font-size:100%}.mw-parser-output .cs1-maint{display:none;color:#33aa33;margin-left:0.3em}.mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration,.mw-parser-output .cs1-format{font-size:95%}.mw-parser-output .cs1-kern-left,.mw-parser-output .cs1-kern-wl-left{padding-left:0.2em}.mw-parser-output .cs1-kern-right,.mw-parser-output .cs1-kern-wl-right{padding-right:0.2em}
  2. ^ abcde Demeter, Michael. “Merger (Risk) Arbitrage Strategy” (PDF).
  3. ^ Spink, Mal. “Hidden Risk In Merger Arbitrage – Deal Extension”. www.mergerarbitragelimited.com.
  4. ^ abcde Baker, Malcolm; Savasoglu, Serkan. “Limited arbitrage in mergers and acquisitions” (PDF).
  5. ^ Karolyi, Andrew; Shannon, John. “Canadian Investment Review”. www.investmentreview.com.
  6. ^ Jetley, Gaurav; Xi, Xinyu. “The Shrinking Merger Arbitrage Spread: Reasons and Implications” (PDF).
  7. ^ abcd Cornelli, Francesca; Li, David. “Risk Arbitrage in Takeovers”.
  8. ^ abc Hsieh, Jim; Walkling, Ralph. “Determinants and implications of arbitrage holdings in acquisitions” (PDF).
  9. ^ abc Maheswaran, Krishnan; Yeoh, Soon Chin. “The Profitability of Merger Arbitrage: Some Australian Evidence”.
  10. ^ abc Mitchell, Mark; Pulvino, Todd. “Characteristics of Risk and Return in Risk Arbitrage” (PDF).

External links

  • Risk Arbitrage – Risk Encyclopedia


Market (economics)

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and resource allocation in a society. Markets allow any trade-able item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights (cf. ownership) of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale (local produce or stock registration).

Markets can differ by products (goods, services) or factors (labour and capital) sold, product differentiation, place in which exchanges are carried, buyers targeted, duration, selling process, government regulation, taxes, subsidies, minimum wages, price ceilings, legality of exchange, liquidity, intensity of speculation, size, concentration, exchange asymmetry, relative prices, volatility and geographic extension. The geographic boundaries of a market may vary considerably, for example the food market in a single building, the real estate market in a local city, the consumer market in an entire country, or the economy of an international trade bloc where the same rules apply throughout. Markets can also be worldwide, see for example the global diamond trade. National economies can also be classified as developed markets or developing markets.

In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services, with or without money, is a transaction.[1]Market participants consist of all the buyers and sellers of a good who influence its price, which is a major topic of study of economics and has given rise to several theories and models concerning the basic market forces of supply and demand. A major topic of debate is how much a given market can be considered to be a “free market”, that is free from government intervention. Microeconomics traditionally focuses on the study of market structure and the efficiency of market equilibrium; when the latter (if it exists) is not efficient, then economists say that a market failure has occurred. However it is not always clear how the allocation of resources can be improved since there is always the possibility of government failure.

Contents

  • 1 Types of markets

    • 1.1 Physical consumer markets
    • 1.2 Physical business markets
    • 1.3 Non-physical markets
    • 1.4 Financial markets
    • 1.5 Unauthorized and illegal markets
  • 2 Mechanisms of markets
  • 3 Study of markets

    • 3.1 Economics
    • 3.2 Marketing
    • 3.3 Sociology
    • 3.4 Economic geography
    • 3.5 Anthropology
  • 4 Mathematical modeling

    • 4.1 Size parameters
  • 5 See also
  • 6 References
  • 7 Further reading

Types of markets

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enables the distribution and allocation of resources in a society. Markets allow any trade-able item to be evaluated and priced. A market sometimes emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights (cf. ownership) of services and goods.

Markets of varying types can spontaneously arise whenever a party has interest in a good or service that some other party can provide. Hence there can be a market for cigarettes in correctional facilities, another for chewing gum in a playground, and yet another for contracts for the future delivery of a commodity. There can be black markets, where a good is exchanged illegally, for example markets for goods under a command economy despite pressure to repress them and virtual markets, such as eBay, in which buyers and sellers do not physically interact during negotiation. A market can be organized as an auction, as a private electronic market, as a commodity wholesale market, as a shopping center, as a complex institution such as a stock market and as an informal discussion between two individuals.

Markets vary in form, scale (volume and geographic reach), location and types of participants as well as the types of goods and services traded. The following is a non exhaustive list:

Physical consumer markets

  • Food retail markets: farmers’ markets, fish markets, wet markets and grocery stores
  • Retail marketplaces: public markets, market squares, Main Streets, High Streets, bazaars, souqs, night markets, shopping strip malls and shopping malls
  • Big-box stores: supermarkets, hypermarkets and discount stores
  • Ad hoc auction markets: process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder
  • Used goods markets such as flea markets
  • Temporary markets such as fairs

Physical business markets

  • Physical wholesale markets: sale of goods or merchandise to retailers; to industrial, commercial, institutional, or other professional business users or to other wholesalers and related subordinated services
  • Markets for intermediate goods used in production of other goods and services
  • Labor markets: where people sell their labour to businesses in exchange for a wage
  • Ad hoc auction markets: process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder
  • Temporary markets such as trade fairs

Non-physical markets

  • Media markets (broadcast market): is a region where the population can receive the same (or similar) television and radio station offerings and may also include other types of media including newspapers and Internet content
  • Internet markets (electronic commerce): trading in products or services using computer networks, such as the Internet
  • Artificial markets created by regulation to exchange rights for derivatives that have been designed to ameliorate externalities, such as pollution permits (see carbon trading)

Financial markets

Financial markets facilitate the exchange of liquid assets. Most investors prefer investing in two markets:

  • The stock markets, for the exchange of shares in corporations (NYSE, AMEX and the NASDAQ are the most common stock markets in the United States)
  • The bond markets

There are also:

  • Currency markets are used to trade one currency for another, and are often used for speculation on currency exchange rates
  • The money market is the name for the global market for lending and borrowing
  • Futures markets, where contracts are exchanged regarding the future delivery of goods are often an outgrowth of general commodity markets
  • Prediction markets are a type of speculative market in which the goods exchanged are futures on the occurrence of certain events; they apply the market dynamics to facilitate information aggregation

Unauthorized and illegal markets

  • Grey markets (parallel markets): is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer[citation needed]
  • markets in illegal goods such as the market for illicit drugs, illegal arms, infringing products, cigarettes sold to minors or untaxed cigarettes (in some jurisdictions), or the private sale of unpasteurized goat milk[2]

Mechanisms of markets

Corn Exchange in London, circa 1809

A market in Râmnicu Vâlcea by Amedeo Preziosi

Cabbage market by Václav Malý

In economics, a market that runs under laissez-faire policies is called a free market, it is “free” from the government, in the sense that the government makes no attempt to intervene through taxes, subsidies, minimum wages, price ceilings and so on. However, market prices may be distorted by a seller or sellers with monopoly power, or a buyer with monopsony power. Such price distortions can have an adverse effect on market participant’s welfare and reduce the efficiency of market outcomes. The relative level of organization and negotiating power of buyers and sellers also markedly affects the functioning of the market.

Markets are a system and systems have structure. The structure of a well-functioning market is defined by the theory of perfect competition. Well-functioning markets of the real world are never perfect, but basic structural characteristics can be approximated for real world markets, for example:

  • Many small buyers and sellers
  • Buyers and sellers have equal access to information
  • Products are comparable

Markets where price negotiations meet equilibrium, but the equilibrium is not efficient are said to experience market failure. Market failures are often associated with time-inconsistent preferences, information asymmetries, non-perfectly competitive markets, principal–agent problems, externalities, or public goods. Among the major negative externalities which can occur as a side effect of production and market exchange, are air pollution (side-effect of manufacturing and logistics) and environmental degradation (side-effect of farming and urbanization).

There exists a popular thought, especially among economists, that free markets would have a structure of a perfect competition.[citation needed] The logic behind this thought is that market failures are thought to be caused by other exogenic systems, and after removing those exogenic systems (“freeing” the markets) the free markets could run without market failures.[citation needed] For a market to be competitive, there must be more than a single buyer or seller. It has been suggested that two people may trade, but it takes at least three persons to have a market, so that there is competition in at least one of its two sides.[3] However, competitive markets—as understood in formal economic theory—rely on much larger numbers of both buyers and sellers. A market with a single seller and multiple buyers is a monopoly. A market with a single buyer and multiple sellers is a monopsony. These are “the polar opposites of perfect competition”.[4] As an argument against such a logic, there is a second view that suggests that the source of market failures is inside the market system itself, therefore the removal of other interfering systems would not result in markets with a structure of perfect competition. As an analogy, such an argument may suggest that capitalists do not want to enhance the structure of markets, just like a coach of a football team would influence the referees or would break the rules if he could while he is pursuing his target of winning the game. Thus according to this view, capitalists are not enhancing the balance of their team versus the team of consumer-workers, so the market system needs a “referee” from outside that balances the game. In this second framework, the role of a “referee” of the market system is usually to be given to a democratic government.

Study of markets

An Afghan market teeming with vendors and shoppers

Monday market in Portovenere, Italy

Wetherby town’s market

Gómez Palacio city’s municipal market

Works Project Administration poster (1937)

Disciplines such as sociology, economic history, economic geography and marketing developed novel understandings of markets[5] studying actual existing markets made up of persons interacting in diverse ways in contrast to an abstract and all-encompassing concepts of “the market”. The term “the market” is generally used in two ways:

  1. “The market” denotes the abstract mechanisms whereby supply and demand confront each other and deals are made; in its place, reference to markets reflects ordinary experience and the places, processes and institutions in which exchanges occurs[6]
  2. “The market” signifies an integrated, all-encompassing and cohesive capitalist world economy.

Economics

Microeconomics (from Greek prefix mikro– meaning “small” and economics) is a branch of economics that studies the behavior of individuals and small impacting organizations in making decisions on the allocation of limited resources (see scarcity). On the other hand, macroeconomics (from the Greek prefix makro– meaning “large” and economics) is a branch of economics dealing with the performance, structure, behavior and decision-making of an economy as a whole, rather than individual markets.

The modern field of microeconomics arose as an effort of neoclassical economics school of thought to put economic ideas into mathematical mode. It began in the 19th century debates surrounding the works of Antoine Augustine Cournot, William Stanley Jevons, Carl Menger and Léon Walras—this period is usually denominated as the Marginal Revolution. A recurring theme of these debates was the contrast between the labor theory of value and the subjective theory of value, the former being associated with classical economists such as Adam Smith, David Ricardo and Karl Marx (Marx was a contemporary of the marginalists).

In his Principles of Economics (1890),[7]Alfred Marshall presented a possible solution to this problem, using the supply and demand model. Marshall’s idea of solving the controversy was that the demand curve could be derived by aggregating individual consumer demand curves, which were themselves based on the consumer problem of maximizing utility. The supply curve could be derived by superimposing a representative firm supply curves for the factors of production and then market equilibrium would be given by the intersection of demand and supply curves. He also introduced the notion of different market periods: mainly long run and short run. This set of ideas gave way to what economists call perfect competition—now found in the standard microeconomics texts—even though Marshall himself was highly skeptical, it could be used as general model of all markets.

Opposed to the model of perfect competition, some models of imperfect competition were proposed:

  • The monopoly model, already considered by marginalist economists, describes a profit maximizing capitalist facing a market demand curve with no competitors, who may practice price discrimination.
  • Oligopoly is a market form in which a market or industry is dominated by a small number of sellers. The oldest model was the duopoly of Cournot (1838).[8] It was criticized by Harold Hotelling for its instability, by Joseph Bertrand for lacking equilibrium for prices as independent variables. Hotelling built a model of market located over a line with two sellers in each extreme of the line, in this case maximizing profit for both sellers leads to a stable equilibrium. From this model also follows that if a seller is to choose the location of his store so as to maximize his profit, he will place his store the closest to his competitor as “the sharper competition with his rival is offset by the greater number of buyers he has an advantage”.[9] He also argues that clustering of stores is wasteful from the point of view of transportation costs and that public interest would dictate more spatial dispersion.
  • Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. The “founding father” of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson published a book called The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition. Chamberlin defined monopolistic competition as “challenge to traditional viewpoint of economics that competition and monopoly are alternatives and that individual prices are to be explained in terms of one or the other”. He continues: “By contrast it is held that most economic situations are composite of both competition and monopoly, and that, wherever this is the case, a false view is given by neglecting either one of the two forces and regarding the situation as made up entirely of the other”.[10]

William Baumol provided in his 1977 paper[11] the current formal definition of a natural monopoly where “an industry in which multiform production is more costly than production by a monopoly”. Baumol defined a contestable market in his 1982 paper as a market where “entry is absolutely free and exit absolutely costless”, freedom of entry in Stigler sense: the incumbent has no cost discrimination against entrants. He states that a contestable market will never have an economic profit greater than zero when in equilibrium and the equilibrium will also be efficient. According to Baumol, this equilibrium emerges endogenously due to the nature of contestable markets, that is the only industry structure that survives in the long run is the one which minimizes total costs. This is in contrast to the older theory of industry structure since not only industry structure is not exogenously given, but equilibrium is reached without add hoc hypothesis on the behavior of firms, say using reaction functions in a duopoly. He concludes the paper commenting that regulators that seek to impede entry and/or exit of firms would do better to not interfere if the market in question resembles a contestable market.

Used cars market: due to presence of fundamental asymmetrical information between seller and buyer the market equilibrium is not efficient—in the language of economists it is a market failure

Around the 1970s the study of market failures came into focus with the study of information asymmetry. In particular, three authors emerged from this period: Akerlof, Spence and Stiglitz. Akerlof considered the problem of bad quality cars driving good quality cars out of the market in his classic “The Market for Lemons” (1970) because of the presence of asymmetrical information between buyers and sellers.[12]Michael Spence explained that signaling was fundamental in the labour market since employers can’t know beforehand which candidate is the most productive, a college degree becomes a signaling device that a firm uses to select new personnel.[13]

C.B. Macpherson identifies an underlying model of the market underlying Anglo-American liberal democratic political economy and philosophy in the seventeenth and eighteenth centuries: persons are cast as self-interested individuals, who enter into contractual relations with other such individuals, concerning the exchange of goods or personal capacities cast as commodities, with the motive of maximizing pecuniary interest. The state and its governance systems are cast as outside of this framework.[14] This model came to dominant economic thinking in the later nineteenth century, as economists such as Ricardo, Mill, Jevons, Walras and later neo-classical economics shifted from reference to geographically located marketplaces to an abstract “market”.[15] This tradition is continued in contemporary neoliberalism, where the market is held up as optimal for wealth creation and human freedom and the states’ role imagined as minimal, reduced to that of upholding and keeping stable property rights, contract and money supply. According to David Harvey, this allowed for boilerplate economic and institutional restructuring under structural adjustment and post-Communist reconstruction.[16] Similar formalism occurs in a wide variety of social democratic and Marxist discourses that situate political action as antagonistic to the market. In particular, commodification theorists such as György Lukács insist that market relations necessarily lead to undue exploitation of labour and so need to be opposed in toto.[17]

A coal power plant in Datteln—emissions trading or cap and trade is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants

A central theme of empirical analyses is the variation and proliferation of types of markets since the rise of capitalism and global scale economies. The Regulation school stresses the ways in which developed capitalist countries have implemented varying degrees and types of environmental, economic and social regulation, taxation and public spending, fiscal policy and government provisioning of goods, all of which have transformed markets in uneven and geographical varied ways and created a variety of mixed economies.

Drawing on concepts of institutional variance and path dependence, varieties of capitalism theorists (such as Peter Hall and David Soskice) identify two dominant modes of economic ordering in the developed capitalist countries, “coordinated market economies” such as Germany and Japan and an Anglo-American “liberal market economies”. However, such approaches imply that the Anglo-American liberal market economies in fact operate in a matter close to the abstract notion of “the market”. While Anglo-American countries have seen increasing introduction of neo-liberal forms of economic ordering, this has not led to simple convergence, but rather a variety of hybrid institutional orderings.[18] Rather, a variety of new markets have emerged, such as for carbon trading or rights to pollute. In some cases, such as emerging markets for water, different forms of privatization of different aspects of previously state run infrastructure have created hybrid private-public formations and graded degrees of commodification, commercialization, and privatization.[19]

Marketing

Perceptual mapping is a diagrammatic technique used by marketers that attempts to visually display the perceptions of customers or potential customers and the position of a product, product line, brand, or company is typically displayed relative to their competition

The marketing management school, evolved in the late 1950s and early 1960s, is fundamentally linked with the marketing mix[20] framework, a business tool used in marketing and by marketers. In his paper “The Concept of the Marketing Mix”, Neil H. Borden reconstructed the history of the term “marketing mix”.[21][22] He started teaching the term after an associate, James Culliton, described the role of the marketing manager in 1948 as a “mixer of ingredients”; one who sometimes follows recipes prepared by others, sometimes prepares his own recipe as he goes along, sometimes adapts a recipe from immediately available ingredients, and at other times invents new ingredients no one else has tried. The marketer E. Jerome McCarthy proposed a four Ps classification (product, price, promotion, place) in 1960, which has since been used by marketers throughout the world.[23] Robert F. Lauterborn proposed a four Cs classification (consumer, price, promotion, place) in 1990 which is a more consumer-oriented version of the four Ps that attempts to better fit the movement from mass marketing to niche marketing.[24] Koichi Shimizu proposed a 7Cs Compass Model (corporation, commodity, cost, communication, channel, consumer, circumstances) to provide a more complete picture of the nature of marketing in 1981.

Businesses market their products/services to a specific segments of consumers. The defining factors of the markets are determined by demographics, interests and age/gender. A form of expansion is to enter a new market and sell/advertise to a different set of users.

Sociology

A prominent entry-point for challenging the market model’s applicability concerns exchange transactions and the homo economicus assumption of self-interest maximization. As of 2012[update], a number of streams of economic sociological analysis of markets focus on the role of the social in transactions and on the ways transactions involve social networks and relations of trust, cooperation and other bonds.[25] Economic geographers in turn draw attention to the ways exchange transactions occur against the backdrop of institutional, social and geographic processes, including class relations, uneven development and historically contingent path-dependencies.[26]Pierre Bourdieu has suggested the market model is becoming self-realizing in virtue of its wide acceptance in national and international institutions through the 1990s.[27]

Trade networks are very old and in this picture the blue line shows the trade network of the Radhanites, circa 870 CE

Michel Callon’s concept of framing provides a useful schema: each economic act or transaction occurs against, incorporates and also re-performs a geographically and cultural specific complex of social histories, institutional arrangements, rules and connections. These network relations are simultaneously bracketed, so that persons and transactions may be disentangled from thick social bonds. The character of calculability is imposed upon agents as they come to work in markets and are “formatted” as calculative agencies. Market exchanges contain a history of struggle and contestation that produced actors predisposed to exchange under certain sets of rules. Therefore, for Challon, market transactions can never be disembedded from social and geographic relations and there is no sense to talking of degrees of embeddedness and disembeddeness.[28] An emerging theme is the interrelationship, inter-penetrability and variations of concepts of persons, commodities and modes of exchange under particular market formations. This is most pronounced in recent movement towards post-structuralist theorizing that draws on Michel Foucault and Actor Network Theory and stress relational aspects of person-hood, and dependence and integration into networks and practical systems. Commodity network approaches further both deconstruct and show alternatives to the market models concept of commodities.[29]

In social systems theory (cf. Niklas Luhmann), markets are also conceptualized as inner environments of the economy. As horizon of all potential investment decisions the market represents the environment of the actually realized investment decisions. However, such inner environments can also be observed in further function systems of society like in political, scientific, religious or mass media systems.[30]

Economic geography

A widespread trend in economic history and sociology is skeptical of the idea that it is possible to develop a theory to capture an essence or unifying thread to markets.[31] For economic geographers, reference to regional, local, or commodity specific markets can serve to undermine assumptions of global integration and highlight geographic variations in the structures, institutions, histories, path dependencies, forms of interaction and modes of self-understanding of agents in different spheres of market exchange.[32] Reference to actual markets can show capitalism not as a totalizing force or completely encompassing mode of economic activity, but rather as “a set of economic practices scattered over a landscape, rather than a systemic concentration of power”.[33]

Wet market in Singapore

Problematic for market formalism is the relationship between formal capitalist economic processes and a variety of alternative forms, ranging from semi-feudal and peasant economies widely operative in many developing economies, to informal markets, barter systems, worker cooperatives, or illegal trades that occur in most developed countries. Practices of incorporation of non-Western peoples into global markets in the nineteenth and twentieth century did not merely result in the quashing of former social economic institutions. Rather, various modes of articulation arose between transformed and hybridized local traditions and social practices and the emergent world economy. By their liberal nature, so called capitalist markets have almost always included a wide range of geographically situated economic practices that do not follow the market model. Economies are thus hybrids of market and non-market elements.[34]

Black market in La Paz

Helpful here is J.K. Gibson-Graham’s complex topology of the diversity of contemporary market economies describing different types of transactions, labour and economic agents. Transactions can occur in black markets (such as for marijuana) or be artificially protected (such as for patents). They can cover the sale of public goods under privatization schemes to co-operative exchanges and occur under varying degrees of monopoly power and state regulation. Likewise, there are a wide variety of economic agents, which engage in different types of transactions on different terms: one cannot assume the practices of a religious kindergarten, multinational corporation, state enterprise, or community-based cooperative can be subsumed under the same logic of calculability. This emphasis on proliferation can also be contrasted with continuing scholarly attempts to show underlying cohesive and structural similarities to different markets.[25] Gibson-Graham thus read a variety of alternative markets for fair trade and organic foods or those using local exchange trading system as not only contributing to proliferation, but also forging new modes of ethical exchange and economic subjectivities.

Anthropology

Economic anthropology is a scholarly field that attempts to explain human economic behavior in its widest historic, geographic and cultural scope. It is practiced by anthropologists and has a complex relationship with the discipline of economics, of which it is highly critical.[citation needed]

A Kula bracelet from the Trobriand Islands

French crown jewels in the Louvre exhibition

Its origins as a sub-field of anthropology begin with the Polish-British founder of anthropology, Bronisław Malinowski, and his French compatriot, Marcel Mauss, on the nature of gift-giving exchange (or reciprocity) as an alternative to market exchange. Studies in economic anthropology for the most part are focused on exchange. Bronisław Malinowski’s path-breaking work, Argonauts of the Western Pacific (1922), addressed the question “why would men risk life and limb to travel across huge expanses of dangerous ocean to give away what appear to be worthless trinkets?”. Malinowski carefully traced the network of exchanges of bracelets and necklaces across the Trobriand Islands and established that they were part of a system of exchange (the Kula ring). He stated that this exchange system was clearly linked to political authority.[35] In the 1920s and later, Malinowski’s study became the subject of debate with the French anthropologist, Marcel Mauss, author of The Gift (Essai sur le don, 1925).[36] Malinowski emphasized the exchange of goods between individuals and their non-altruistic motives for giving: they expected a return of equal or greater value (colloquially referred to as “Indian giving”). In other words, reciprocity is an implicit part of gifting as no “free gift” is given without expectation of reciprocity. In contrast, Mauss has emphasized that the gifts were not between individuals, but between representatives of larger collectivities. He argued these gifts were a “total prestation” as they were not simple, alienable commodities to be bought and sold, but like the “Crown jewels” embodied the reputation, history and sense of identity of a “corporate kin group”, such as a line of kings. Given the stakes, Mauss asked “why anyone would give them away?” and his answer was an enigmatic concept, “the spirit of the gift”. A good part of the confusion (and resulting debate) was due to a bad translation. Mauss appeared to be arguing that a return gift is given to keep the very relationship between givers alive; a failure to return a gift ends the relationship; and the promise of any future gifts. Based on an improved translate, Jonathan Parry has demonstrated that Mauss was arguing that the concept of a “pure gift” given altruistically only emerges in societies with a well-developed market ideology.[35]

Rather than emphasize how particular kinds of objects are either gifts or commodities to be traded in restricted spheres of exchange, Arjun Appadurai and others began to look at how objects flowed between these spheres of exchange. They shifted attention away from the character of the human relationships formed through exchange and placed it on “the social life of things” instead. They examined the strategies by which an object could be “singularized” (made unique, special, one-of-a-kind) and so withdrawn from the market. A marriage ceremony that transforms a purchased ring into an irreplaceable family heirloom is one example whereas the heirloom in turn makes a perfect gift.

Mathematical modeling

Although arithmetic has been used since the beginning of civilization to set prices, it was not until the 19th century that more advanced mathematical tools began to be used to study markets in the form of social statistics. More recent techniques include business intelligence, data mining and marketing engineering.

Size parameters

Market size can be given in terms of the number of buyers and sellers in a particular market[37] or in terms of the total exchange of money in the market, generally annually (per year). When given in terms of money, market size is often termed “market value”, but in a sense distinct from market value of individual products. For one and the same goods, there may be different (and generally increasing) market values at the production level, the wholesale level and the retail level. For example, the value of the global illicit drug market for the year 2003 was estimated by the United Nations to be US$13 billion at the production level, $94 billion at the wholesale level (taking seizures into account) and US$322 billion at the retail level (based on retail prices and taking seizures and other losses into account).[38]

See also

  • Grocery store
  • Knowledge market
  • Market economy
  • Market engineering
  • Market information systems
  • Market microstructure
  • Market town
  • Shopper marketing

References

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  10. ^ Chamberlin, E.H. (1937). “Monopolistic or Imperfect Competition?”. The Quarterly Journal of Economics. 51 (4): 557–580. doi:10.2307/1881679. JSTOR 1881679.
  11. ^ Baumol, William J. (1977). “On the Proper Cost Tests for Natural Monopoly in a Multiproduct Industry”. American Economic Review. 67 (5): 809–822. JSTOR 1828065.
  12. ^ Akerlof, George A. (1970). “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”. Quarterly Journal of Economics. 84 (3): 488–500. doi:10.2307/1879431. JSTOR 1879431.
  13. ^ Spence, A.M. (1973). “Job Market Signaling”. Quarterly Journal of Economics. 87 (3): 355–374. doi:10.2307/1882010. JSTOR 1882010.
  14. ^ MacPherson, C.B. (1962) The Political Theory of Possessive Individualism: From Hobbes to Locke. Oxford Clarendon Press. p.3
  15. ^ Swedberg, 1994, p. 258
  16. ^ Harvey, David (2005) A Short History of Neoliberalism Oxford University Press.
  17. ^ Lukács, György. (1971) History and Class Consciousness. Trans. Rodney Livingstone. Merlin Press. London. p. 87
  18. ^ Peck, supra, p. 154)
  19. ^ Bakker, Karen (2005) “Neoliberalizing Nature?: Market Environmentalism in water supply in England and Wales” Annals of the Association of American Geographers 95 (3), 542–565
  20. ^ Michael J Baker, Michael John Baker, Michael Saren, Marketing Theory: A Student Text, SAGE 2010
  21. ^
    Borden, Neil. “The Concept of the Marketing Mix”. Suman Thapa. Retrieved 24 April 2013.
  22. ^ Borden, Neil H. (1965). “The Concept of the Marketing Mix”. In Schwartz, George. Science in marketing. Wiley marketing series. Wiley. pp. 286ff. Retrieved November 4, 2013.
  23. ^ Needham, Dave (1996). Business for Higher Awards. Oxford, England: Heinemann.
  24. ^ Lauterborn, B. (1990). New Marketing Litany: Four Ps Passé: C-Words Take Over. Advertising Age, 61(41), 26.
  25. ^ ab Swedberg, 1994, p. 267
  26. ^ Martin, Ron (2000) “Institutional Approaches in Economic Geography”, Handbook of Economic Geography. Ed. Eric Sheppard and Trevor J. Barnes. Blackwell Publishers.Peck, 2005
  27. ^ Bourdieu, Pierre (1999) Acts of Resistance: Against the Tyranny of the Market. The New Press.p. 95
  28. ^ Callon, 1998; Mitchell, 2002, p. 291,
  29. ^ Hughes, Alex (2005) “Geographies of Exchange and Circulation: alternative trading spaces” Progress in Human Geography
  30. ^ Roth, Steffen (2012). “Leaving commonplaces on the common place: Cornerstones of a polyphonic market theory”. Journal for Critical Organization Inquiry. 10 (3): 43–52. SSRN 2192754.
  31. ^
    Swedberg, Richard (1994) “Markets as Social Structures” The Handbook of Economic Sociology. Ed. Neil Smelser and Richard Swedberg. Princeton University Press.
    OCLC 29703776, p. 258)
  32. ^
    Peck, J. (2005) “Economic Geographies in Space” Economic Geography 81(2) 129–175.
  33. ^ (Gibson-Graham, J.K. (2006) Postcapitalist Politics. University of Minnesota Press,. p. 2).
  34. ^ (Mitchell, Timothy (2002) Rule of Experts. University of California Pressp. 270; Gibson-Graham 2006, supra pp. 53–78)
  35. ^ ab Parry, Jonathan (1986). “The Gift, the Indian Gift and the ‘Indian Gift“. Man. 21 (3): 453–473. doi:10.2307/2803096. JSTOR 2803096.
  36. ^ Mauss, Marcel (1970). The Gift: Forms and Functions of Exchange in Archaic Societies. London: Cohen & West.
  37. ^ investorwords.com > market size Retrieved on April 17, 2010
  38. ^ United Nations, “2005 World Drug Report,” Office on Drugs and Crime, June 2005, p. 16. [1]

Further reading

@media all and (max-width:720px){.mw-parser-output .mobile-float-reset{float:none!important;width:100%!important}}.mw-parser-output .stack-container{box-sizing:border-box}.mw-parser-output .stack-clear-left{float:left;clear:left}.mw-parser-output .stack-clear-right{float:right;clear:right}.mw-parser-output .stack-left{float:left}.mw-parser-output .stack-right{float:right}.mw-parser-output .stack-object{margin:1px;overflow:hidden}

  • Pindyck, Robert S. and Daniel L. Rubinfeld, Microeconomics, Prentice Hall 2012.
  • Frank, Robert H., Microeconomics and Behavior, 6th ed., McGraw-Hill/Irwin 2006.
  • Kotler, P. and Keller, K.L., Marketing Management, Prentice Hall 2011.
  • Baker, Michael J. and Michael Saren, Marketing Theory: A Student Text, Sage 2010. online.
  • Aspers, Patrik, Markets, Polity Press 2011. online.
  • Bauer, Leonard and Herbert Matis (1988) From moral to political economy: The Genesis of social sciences, History of European Ideas 9 (2), 125–143.
  • Nathaus, Klaus and David Gilgen (Eds.), Change of Markets and Market Societies: Concepts and Case Studies. Historical Social Research 36 (3), Special Issue, 2011.


Fat-finger error

A fat-finger error is a keyboard input error or mouse misclick in the financial markets such as the stock market or foreign exchange market whereby an order to buy or sell is placed of far greater size than intended, for the wrong stock or contract, at the wrong price, or with any number of other input errors.[1][2][3]

Automated systems within trading houses may catch fat-finger errors before they reach the market or such orders may be cancelled before they can be fulfilled.[4] The larger the order, the more likely it is to be cancelled, as it may be an order larger than the amount of stock available in the market.

Fat-finger errors are a product of the electronic processing of orders which requires details to be input using keyboards. Before trading was computerised, erroneous orders were known as “out-trades” which could be cancelled before proceeding. Erroneous orders placed using computers may be harder or impossible to cancel.[4]

Contents

  • 1 Deadlines for review & cancellation
  • 2 Exclusion of rescission rights
  • 3 Examples
  • 4 See also
  • 5 References

Deadlines for review & cancellation

In order to have legal certainty at the stock exchange, all exchanges have tight deadlines to request a review and cancellation, if possible. At the NYSE, BATS, CBOT, NASDAQ, OMX and American Stock Exchange requests for review must be received within thirty (30) minutes of execution time.[5][6]

At the NYSE-Euronext Liffe (Paris, Brussels, Amsterdam), “Where a member has executed an Erroneous trade, he will have a maximum of 30 minutes from the time of execution within which he may contact Market Services to request an invalidation“.[7]

At the London Stock Exchange “any requests from member firms to cancel trades should be made to the Market Supervision department as soon as possible and in any event within 30 minutes of the trade time”.[8]

At the Singapore Exchange, “the matter must be referred to SGX-ST within sixty (60) minutes from the time the error trade occurred”.[9][10]

The Frankfurt Stock Exchange in Germany applies the following rules: in case of transactions in securities traded in Continuous Auction, the Mistrade application shall be submitted within two trading hours upon receipt of the execution confirmation pursuant to § 2 Paragraph 1 Clause 2. As far as transactions of securities other than structured products, which are traded in Continuous Auction, are concerned, the application term ends according to Clause 1 upon closing of trading hours for that day, so the mistrade application has to be submitted within half an hour after the closing of trading hours at the latest.[11]

Exclusion of rescission rights

In order to have legal certainty and in order to avoid the situation that courts have to decide ex-post if a trade should be binding or not, erroneous trade rules of exchanges usually exclude civil-law rescission rights.[12]

This explains why banks usually have to carry huge losses when clearly erroneous trades occurred that have not been detected within 30 minutes.[13]

Examples

Fat-finger errors are a regular occurrence in the financial markets:

  • In 2001, UBS sold 610,000 Dentsu-shares at ¥6, instead of 6 Dentsu-shares at ¥610,000. Even though the error was spotted immediately, the Tokyo Stock Exchange did not cancel the trades and UBS had to buy back the shares at market-value which caused them a loss of US$100m.[14]
  • In 2006, a fat-finger error by a trader at Mizuho Securities in Japan caused the firm to short sell a stock in an error that cost the firm ¥40 billion to unwind.[3]
  • In 2014, a Japanese broker erroneously placed orders for more than US$600bn (£370bn) of stock in leading Japanese companies, including Nomura, Toyota Motors, and Honda, which were subsequently cancelled.[15][16]
  • In 2015, a junior employee at Deutsche Bank whose superior was on vacation confused gross and net amounts while processing a trade, causing a payment to a US hedge fund of US$6bn, orders of magnitude higher than the correct amount.[17] The bank reported the error to the British Financial Conduct Authority, the European Central Bank and the US Federal Reserve Bank, and retrieved the money on the following day.[17]
  • In 2015, the Investor Armin S. bought certificates from BNP Paribas at a price of €108 instead of €54,400 each. This caused a loss of €160m for BNP.[18][19][20] The error was not detected because BNP failed to book more than 8000 trades for a whole week [21][22][1]
  • In 2016, it was believed a fat-finger error caused the British pound to drop 6% in just a few minutes to US$1.1841, its lowest value for 31 years.[23] A report by the Bank for International Settlements later concluded that the drop was not caused by a single factor.[24]
  • On 8 April 2018 in the 2018 Samsung fat-finger error the company issued a huge sum of money[quantify] to employees in a stock ownership plan. The error disrupted the Korean finance market.
  • In 2018, Deutsche Bank mistakenly transferred 28 billion euros to one of its outside accounts, more than the bank’s market value.[25]

See also

  • Flash crash
  • Typographical error

References

  1. ^ Fat Finger Error. Investopedia. Retrieved 7 October 2014.
  2. ^ Fat fingers. Nasdaq. Retrieved 7 October 2014.
  3. ^ ab ft.com/ lexicon. Financial Times. Retrieved 7 October 2014.
  4. ^ ab Gorham, Michael; Nidhi Singh. (2009). Electronic Exchanges: The Global Transformation from Pits to Bits. Burlington: Elsevier. p. 299. ISBN 978-0-08-092140-2..mw-parser-output cite.citation{font-style:inherit}.mw-parser-output .citation q{quotes:”””””””‘””‘”}.mw-parser-output .citation .cs1-lock-free a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/6/65/Lock-green.svg/9px-Lock-green.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .citation .cs1-lock-limited a,.mw-parser-output .citation .cs1-lock-registration a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/d/d6/Lock-gray-alt-2.svg/9px-Lock-gray-alt-2.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .citation .cs1-lock-subscription a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/a/aa/Lock-red-alt-2.svg/9px-Lock-red-alt-2.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration{color:#555}.mw-parser-output .cs1-subscription span,.mw-parser-output .cs1-registration span{border-bottom:1px dotted;cursor:help}.mw-parser-output .cs1-ws-icon a{background:url(“//upload.wikimedia.org/wikipedia/commons/thumb/4/4c/Wikisource-logo.svg/12px-Wikisource-logo.svg.png”)no-repeat;background-position:right .1em center}.mw-parser-output code.cs1-code{color:inherit;background:inherit;border:inherit;padding:inherit}.mw-parser-output .cs1-hidden-error{display:none;font-size:100%}.mw-parser-output .cs1-visible-error{font-size:100%}.mw-parser-output .cs1-maint{display:none;color:#33aa33;margin-left:0.3em}.mw-parser-output .cs1-subscription,.mw-parser-output .cs1-registration,.mw-parser-output .cs1-format{font-size:95%}.mw-parser-output .cs1-kern-left,.mw-parser-output .cs1-kern-wl-left{padding-left:0.2em}.mw-parser-output .cs1-kern-right,.mw-parser-output .cs1-kern-wl-right{padding-right:0.2em}
  5. ^ “Rule 7.10. Clearly Erroneous Executions” (PDF). 2014-06-19. Retrieved 2016-11-20.
  6. ^ “SEC Approves Consistent Exchange Rules on Breaking “Clearly Erroneous” Trades”. 2009-10-05. Retrieved 2017-11-02.
  7. ^ “BULLETIN DE PARIS No. 2007 – 030”. Euronext Liffe. 2007-09-25. Retrieved 2016-11-28.
  8. ^ “Rules of the London Stock Exchange” (PDF). 2017-03-13. Archived from the original (PDF) on 2012-04-17. Retrieved 9 May 2017.
  9. ^ “Singapore Exchange Rulebook – Errors”. 2014-02-24. Retrieved 2017-11-05.
  10. ^ “SGX Reveals Information Concerning Revised Error Trade Policy”.
  11. ^ “Conditions for Transactions on the Frankfurter Wertpapierbörse” (PDF). Frankfurt Stock Exchange. 2015-11-30. Retrieved 2016-11-20.
  12. ^ “Conditions for Transactions on the Frankfurter Wertpapierbörse §32” (PDF). 2017-06-26. Claims by civil law of the business parties according to § 2 Paragraph 1 and 2 to cancellation and adjustment of transactions as well as the right to appeal against transactions are excluded
  13. ^ Dunne, Helen (2001-12-01). “Trader’s slip leaves UBS Warburg £71m poorer”. www.telegraph.co.uk.
  14. ^ Editor, By Helen Dunne, Associate City. “Trader’s slip leaves UBS Warburg £71m poorer”. Telegraph.co.uk. Retrieved 2017-06-24.
  15. ^ Japan stocks rattled by $617bn ‘fat finger’ trading error. BBC News, 2 October 2014. Retrieved 3 October 2014.
  16. ^ $617 Billion in Japan Stock Orders Scrapped After Error. Anna Kitanaka and Toshiro Hasegawa, Bloomberg, 1 October 2014. Retrieved 7 October 2014.
  17. ^ ab Faux, Zeke (2015-10-19). “Deutsche Bank Error Sent $6 Billion to Fund in June, FT Reports”. Bloomberg.com. Retrieved 2015-10-20.
  18. ^ Lusk, Michael (2017-07-31). “Do banks’ internal control systems work?”.
  19. ^ “Un trader réclame 161 millions d’euros à BNP Paribas”. lesechos.fr. 2017-03-11. Retrieved 2017-06-24.
  20. ^ “Daytrader verlangt von BNP Paribas wegen Preisirrtum 152 Mio € – WELT”. DIE WELT (in German). Retrieved 2017-06-24.
  21. ^ Binham, Caroline (2018-03-09). “BNP Paribas failed to book trades in Germany for a week”. Retrieved 2018-04-01.
  22. ^ “152m EUR risk management affair”. 2018-09-26.
  23. ^ Treanor, Jill; Davies, Justin McCurry Rob (2016-10-07). “Bank of England investigating dramatic overnight fall in pound”. The Guardian. ISSN 0261-3077. Retrieved 2016-10-07.
  24. ^ “No single factor behind sterling flash crash, BIS says”. BBC News. 2017-01-13. Retrieved 2017-01-14.
  25. ^ https://www.bloomberg.com/news/articles/2018-04-19/deutsche-bank-flub-said-to-send-35-billion-briefly-out-the-door


What actually drives a stock price up ou down?

The name of the pictureThe name of the pictureThe name of the pictureClash Royale CLAN TAG#URR8PPP

1

Can someone please explain to me how stock prices go up and down? What are the underlying physical and information technology phenomena and algorithms that drive a stock up or down? Books just say that a stock price reflects what their owners think the stock is worth and not what it is actually worth.

Thank you for your feedback.

share|improve this question

  • Seeing as this is quant.se and money.se, can it be assumed that you aren’t just asking where the price is decided, but you’re asking for a deeper explanation of why people do the things that move the price?
    – immibis
    Dec 17 at 23:18

  • I’m puzzled by what you mean by “information technology phenomena and algorithms” affecting a stock’s price. Perhaps you’re asking about how algorithm trading affects stock prices, or perhaps you’re asking what criterion it uses to make buy/sell decisions. The latter is probably all proprietary voodoo that nobody is allowed to talk about.
    – James K Polk
    Dec 18 at 0:58

1

Can someone please explain to me how stock prices go up and down? What are the underlying physical and information technology phenomena and algorithms that drive a stock up or down? Books just say that a stock price reflects what their owners think the stock is worth and not what it is actually worth.

Thank you for your feedback.

share|improve this question

  • Seeing as this is quant.se and money.se, can it be assumed that you aren’t just asking where the price is decided, but you’re asking for a deeper explanation of why people do the things that move the price?
    – immibis
    Dec 17 at 23:18

  • I’m puzzled by what you mean by “information technology phenomena and algorithms” affecting a stock’s price. Perhaps you’re asking about how algorithm trading affects stock prices, or perhaps you’re asking what criterion it uses to make buy/sell decisions. The latter is probably all proprietary voodoo that nobody is allowed to talk about.
    – James K Polk
    Dec 18 at 0:58

1

1

1

1

Can someone please explain to me how stock prices go up and down? What are the underlying physical and information technology phenomena and algorithms that drive a stock up or down? Books just say that a stock price reflects what their owners think the stock is worth and not what it is actually worth.

Thank you for your feedback.

share|improve this question

Can someone please explain to me how stock prices go up and down? What are the underlying physical and information technology phenomena and algorithms that drive a stock up or down? Books just say that a stock price reflects what their owners think the stock is worth and not what it is actually worth.

Thank you for your feedback.

market-data market-microstructure market-making market financial-markets

share|improve this question

share|improve this question

share|improve this question

share|improve this question

edited Dec 17 at 22:33

Daneel Olivaw

2,8281529

2,8281529

asked Dec 17 at 20:35

Joselin Jocklingson

101

101

  • Seeing as this is quant.se and money.se, can it be assumed that you aren’t just asking where the price is decided, but you’re asking for a deeper explanation of why people do the things that move the price?
    – immibis
    Dec 17 at 23:18

  • I’m puzzled by what you mean by “information technology phenomena and algorithms” affecting a stock’s price. Perhaps you’re asking about how algorithm trading affects stock prices, or perhaps you’re asking what criterion it uses to make buy/sell decisions. The latter is probably all proprietary voodoo that nobody is allowed to talk about.
    – James K Polk
    Dec 18 at 0:58

  • Seeing as this is quant.se and money.se, can it be assumed that you aren’t just asking where the price is decided, but you’re asking for a deeper explanation of why people do the things that move the price?
    – immibis
    Dec 17 at 23:18

  • I’m puzzled by what you mean by “information technology phenomena and algorithms” affecting a stock’s price. Perhaps you’re asking about how algorithm trading affects stock prices, or perhaps you’re asking what criterion it uses to make buy/sell decisions. The latter is probably all proprietary voodoo that nobody is allowed to talk about.
    – James K Polk
    Dec 18 at 0:58

Seeing as this is quant.se and money.se, can it be assumed that you aren’t just asking where the price is decided, but you’re asking for a deeper explanation of why people do the things that move the price?
– immibis
Dec 17 at 23:18

Seeing as this is quant.se and money.se, can it be assumed that you aren’t just asking where the price is decided, but you’re asking for a deeper explanation of why people do the things that move the price?
– immibis
Dec 17 at 23:18

I’m puzzled by what you mean by “information technology phenomena and algorithms” affecting a stock’s price. Perhaps you’re asking about how algorithm trading affects stock prices, or perhaps you’re asking what criterion it uses to make buy/sell decisions. The latter is probably all proprietary voodoo that nobody is allowed to talk about.
– James K Polk
Dec 18 at 0:58

I’m puzzled by what you mean by “information technology phenomena and algorithms” affecting a stock’s price. Perhaps you’re asking about how algorithm trading affects stock prices, or perhaps you’re asking what criterion it uses to make buy/sell decisions. The latter is probably all proprietary voodoo that nobody is allowed to talk about.
– James K Polk
Dec 18 at 0:58

3 Answers
3

active

oldest

votes

3

The short answer: many factors. The following are some key ones:

  1. Reported Trades – Stocks are quoted “bid” and “ask” rates. These are the traders setting their prices much similar to a local farmers market trading their produce.
  2. Volume – number of shares traded.
  3. Price trend – When the bid volume is higher than the ask volume, the selling is stronger, and the price is more likely to move down than up. When the ask volume is higher than the bid volume, the buying is stronger, and the price is more likely to move up than down.
  4. Institutional actions – Institutions account for most of the trading in larger stocks, so their action usually has the most influence on the stock price.

References:

  1. https://finance.zacks.com/can-tell-direction-stock-price-looking-bid-vs-ask-volume-2758.html
  2. https://money.stackexchange.com/questions/35686/how-is-stock-price-determined
share|improve this answer

    1

    Stocks are usually traded by (one or more) Market Maker(s), who stand ready to sell to you at a price $s_a$ or buy from you at a price $s_b$. Since $s_a>s_b$ they make a profit if the price does not change. However, they also own stock themselves (between the time you sell it to them and someone else buys it from them). They have to manage this “inventory” carefully.

    If $s_a,s_b$ are too high (higher than the market consensus) they will find that a lot of people want to sell to them and no one want to buy. Their inventory will rapidly increase and they will be stuck with a lot of unsaleable stock. Vice versa if $s_a,s_b$ is too low, a lot of people want to buy no one wants to sell, their inventory will quickly go to zero and they will be out of business again.

    As a result market makers are very sensitive to the balance of supply and demand from investors. They constantly adjust their prices, lowering it if it seems there is excess supply (more sellers than buyers) and raising it it if they see excess demand. Price will quickly adjust to the momentary supply/demand for the stock from investors.

    The prices in other markets (food, housing) also adjusts to supply and demand, but not as quickly. It takes a long time for a food store to adjust its sales prices, and even longer for the seller of a house to adjust. With stocks the adjustment is nearly instantaneous (because many people can buy or sell the item instantly in a central two-way market).

    share|improve this answer

    • Thank you for your answer. However when you do online trading I do not recall seeing two prices as and sb. I recall seeing a single price plus transaction fees. How do you explain this conflict of data presentation between what you see online and your explanation?
      – Joselin Jocklingson
      Dec 19 at 16:19

    • Actually, there are bid and ask rates I suppose, but when I studied mathematical finance and Brownian morons there was a single graph, with bid and ask rates coinciding. Why doesn’t my math book account for both and how do I adjust the theory to make it match.
      – Joselin Jocklingson
      Dec 19 at 16:27

    0

    That’s a most difficult question to answer as the famous quote says “in short run the markets are like voting machines”. What I have seen is most people try to correlate the stock price movement with the macro or micro events happening around. For instance, if the Indian indices fall then people start to relate it with a rise in crude prices or a rise in the current account deficit. However, on most days, I believe it is very difficult to give exact reasons for why a stock price is rising or falling.

    In long run, the stock prices are weighing machines and the price will follow the earnings of the company. Therefore, you can determine a way in which you can identify fundamentally strong companies and invest in them and identify fundamentally weak companies and short them. You can employ quant techniques to find fundamentally strong and weak companies.

    share|improve this answer

      Your Answer

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      3 Answers
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      active

      oldest

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      3 Answers
      3

      active

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      oldest

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      active

      oldest

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      3

      The short answer: many factors. The following are some key ones:

      1. Reported Trades – Stocks are quoted “bid” and “ask” rates. These are the traders setting their prices much similar to a local farmers market trading their produce.
      2. Volume – number of shares traded.
      3. Price trend – When the bid volume is higher than the ask volume, the selling is stronger, and the price is more likely to move down than up. When the ask volume is higher than the bid volume, the buying is stronger, and the price is more likely to move up than down.
      4. Institutional actions – Institutions account for most of the trading in larger stocks, so their action usually has the most influence on the stock price.

      References:

      1. https://finance.zacks.com/can-tell-direction-stock-price-looking-bid-vs-ask-volume-2758.html
      2. https://money.stackexchange.com/questions/35686/how-is-stock-price-determined
      share|improve this answer

        3

        The short answer: many factors. The following are some key ones:

        1. Reported Trades – Stocks are quoted “bid” and “ask” rates. These are the traders setting their prices much similar to a local farmers market trading their produce.
        2. Volume – number of shares traded.
        3. Price trend – When the bid volume is higher than the ask volume, the selling is stronger, and the price is more likely to move down than up. When the ask volume is higher than the bid volume, the buying is stronger, and the price is more likely to move up than down.
        4. Institutional actions – Institutions account for most of the trading in larger stocks, so their action usually has the most influence on the stock price.

        References:

        1. https://finance.zacks.com/can-tell-direction-stock-price-looking-bid-vs-ask-volume-2758.html
        2. https://money.stackexchange.com/questions/35686/how-is-stock-price-determined
        share|improve this answer

          3

          3

          3

          The short answer: many factors. The following are some key ones:

          1. Reported Trades – Stocks are quoted “bid” and “ask” rates. These are the traders setting their prices much similar to a local farmers market trading their produce.
          2. Volume – number of shares traded.
          3. Price trend – When the bid volume is higher than the ask volume, the selling is stronger, and the price is more likely to move down than up. When the ask volume is higher than the bid volume, the buying is stronger, and the price is more likely to move up than down.
          4. Institutional actions – Institutions account for most of the trading in larger stocks, so their action usually has the most influence on the stock price.

          References:

          1. https://finance.zacks.com/can-tell-direction-stock-price-looking-bid-vs-ask-volume-2758.html
          2. https://money.stackexchange.com/questions/35686/how-is-stock-price-determined
          share|improve this answer

          The short answer: many factors. The following are some key ones:

          1. Reported Trades – Stocks are quoted “bid” and “ask” rates. These are the traders setting their prices much similar to a local farmers market trading their produce.
          2. Volume – number of shares traded.
          3. Price trend – When the bid volume is higher than the ask volume, the selling is stronger, and the price is more likely to move down than up. When the ask volume is higher than the bid volume, the buying is stronger, and the price is more likely to move up than down.
          4. Institutional actions – Institutions account for most of the trading in larger stocks, so their action usually has the most influence on the stock price.

          References:

          1. https://finance.zacks.com/can-tell-direction-stock-price-looking-bid-vs-ask-volume-2758.html
          2. https://money.stackexchange.com/questions/35686/how-is-stock-price-determined
          share|improve this answer

          share|improve this answer

          share|improve this answer

          answered Dec 17 at 20:54

          Socratees Samipillai

          1313

          1313

              1

              Stocks are usually traded by (one or more) Market Maker(s), who stand ready to sell to you at a price $s_a$ or buy from you at a price $s_b$. Since $s_a>s_b$ they make a profit if the price does not change. However, they also own stock themselves (between the time you sell it to them and someone else buys it from them). They have to manage this “inventory” carefully.

              If $s_a,s_b$ are too high (higher than the market consensus) they will find that a lot of people want to sell to them and no one want to buy. Their inventory will rapidly increase and they will be stuck with a lot of unsaleable stock. Vice versa if $s_a,s_b$ is too low, a lot of people want to buy no one wants to sell, their inventory will quickly go to zero and they will be out of business again.

              As a result market makers are very sensitive to the balance of supply and demand from investors. They constantly adjust their prices, lowering it if it seems there is excess supply (more sellers than buyers) and raising it it if they see excess demand. Price will quickly adjust to the momentary supply/demand for the stock from investors.

              The prices in other markets (food, housing) also adjusts to supply and demand, but not as quickly. It takes a long time for a food store to adjust its sales prices, and even longer for the seller of a house to adjust. With stocks the adjustment is nearly instantaneous (because many people can buy or sell the item instantly in a central two-way market).

              share|improve this answer

              • Thank you for your answer. However when you do online trading I do not recall seeing two prices as and sb. I recall seeing a single price plus transaction fees. How do you explain this conflict of data presentation between what you see online and your explanation?
                – Joselin Jocklingson
                Dec 19 at 16:19

              • Actually, there are bid and ask rates I suppose, but when I studied mathematical finance and Brownian morons there was a single graph, with bid and ask rates coinciding. Why doesn’t my math book account for both and how do I adjust the theory to make it match.
                – Joselin Jocklingson
                Dec 19 at 16:27

              1

              Stocks are usually traded by (one or more) Market Maker(s), who stand ready to sell to you at a price $s_a$ or buy from you at a price $s_b$. Since $s_a>s_b$ they make a profit if the price does not change. However, they also own stock themselves (between the time you sell it to them and someone else buys it from them). They have to manage this “inventory” carefully.

              If $s_a,s_b$ are too high (higher than the market consensus) they will find that a lot of people want to sell to them and no one want to buy. Their inventory will rapidly increase and they will be stuck with a lot of unsaleable stock. Vice versa if $s_a,s_b$ is too low, a lot of people want to buy no one wants to sell, their inventory will quickly go to zero and they will be out of business again.

              As a result market makers are very sensitive to the balance of supply and demand from investors. They constantly adjust their prices, lowering it if it seems there is excess supply (more sellers than buyers) and raising it it if they see excess demand. Price will quickly adjust to the momentary supply/demand for the stock from investors.

              The prices in other markets (food, housing) also adjusts to supply and demand, but not as quickly. It takes a long time for a food store to adjust its sales prices, and even longer for the seller of a house to adjust. With stocks the adjustment is nearly instantaneous (because many people can buy or sell the item instantly in a central two-way market).

              share|improve this answer

              • Thank you for your answer. However when you do online trading I do not recall seeing two prices as and sb. I recall seeing a single price plus transaction fees. How do you explain this conflict of data presentation between what you see online and your explanation?
                – Joselin Jocklingson
                Dec 19 at 16:19

              • Actually, there are bid and ask rates I suppose, but when I studied mathematical finance and Brownian morons there was a single graph, with bid and ask rates coinciding. Why doesn’t my math book account for both and how do I adjust the theory to make it match.
                – Joselin Jocklingson
                Dec 19 at 16:27

              1

              1

              1

              Stocks are usually traded by (one or more) Market Maker(s), who stand ready to sell to you at a price $s_a$ or buy from you at a price $s_b$. Since $s_a>s_b$ they make a profit if the price does not change. However, they also own stock themselves (between the time you sell it to them and someone else buys it from them). They have to manage this “inventory” carefully.

              If $s_a,s_b$ are too high (higher than the market consensus) they will find that a lot of people want to sell to them and no one want to buy. Their inventory will rapidly increase and they will be stuck with a lot of unsaleable stock. Vice versa if $s_a,s_b$ is too low, a lot of people want to buy no one wants to sell, their inventory will quickly go to zero and they will be out of business again.

              As a result market makers are very sensitive to the balance of supply and demand from investors. They constantly adjust their prices, lowering it if it seems there is excess supply (more sellers than buyers) and raising it it if they see excess demand. Price will quickly adjust to the momentary supply/demand for the stock from investors.

              The prices in other markets (food, housing) also adjusts to supply and demand, but not as quickly. It takes a long time for a food store to adjust its sales prices, and even longer for the seller of a house to adjust. With stocks the adjustment is nearly instantaneous (because many people can buy or sell the item instantly in a central two-way market).

              share|improve this answer

              Stocks are usually traded by (one or more) Market Maker(s), who stand ready to sell to you at a price $s_a$ or buy from you at a price $s_b$. Since $s_a>s_b$ they make a profit if the price does not change. However, they also own stock themselves (between the time you sell it to them and someone else buys it from them). They have to manage this “inventory” carefully.

              If $s_a,s_b$ are too high (higher than the market consensus) they will find that a lot of people want to sell to them and no one want to buy. Their inventory will rapidly increase and they will be stuck with a lot of unsaleable stock. Vice versa if $s_a,s_b$ is too low, a lot of people want to buy no one wants to sell, their inventory will quickly go to zero and they will be out of business again.

              As a result market makers are very sensitive to the balance of supply and demand from investors. They constantly adjust their prices, lowering it if it seems there is excess supply (more sellers than buyers) and raising it it if they see excess demand. Price will quickly adjust to the momentary supply/demand for the stock from investors.

              The prices in other markets (food, housing) also adjusts to supply and demand, but not as quickly. It takes a long time for a food store to adjust its sales prices, and even longer for the seller of a house to adjust. With stocks the adjustment is nearly instantaneous (because many people can buy or sell the item instantly in a central two-way market).

              share|improve this answer

              share|improve this answer

              share|improve this answer

              edited Dec 17 at 22:14

              answered Dec 17 at 22:06

              Alex C

              5,7611922

              5,7611922

              • Thank you for your answer. However when you do online trading I do not recall seeing two prices as and sb. I recall seeing a single price plus transaction fees. How do you explain this conflict of data presentation between what you see online and your explanation?
                – Joselin Jocklingson
                Dec 19 at 16:19

              • Actually, there are bid and ask rates I suppose, but when I studied mathematical finance and Brownian morons there was a single graph, with bid and ask rates coinciding. Why doesn’t my math book account for both and how do I adjust the theory to make it match.
                – Joselin Jocklingson
                Dec 19 at 16:27

              • Thank you for your answer. However when you do online trading I do not recall seeing two prices as and sb. I recall seeing a single price plus transaction fees. How do you explain this conflict of data presentation between what you see online and your explanation?
                – Joselin Jocklingson
                Dec 19 at 16:19

              • Actually, there are bid and ask rates I suppose, but when I studied mathematical finance and Brownian morons there was a single graph, with bid and ask rates coinciding. Why doesn’t my math book account for both and how do I adjust the theory to make it match.
                – Joselin Jocklingson
                Dec 19 at 16:27

              Thank you for your answer. However when you do online trading I do not recall seeing two prices as and sb. I recall seeing a single price plus transaction fees. How do you explain this conflict of data presentation between what you see online and your explanation?
              – Joselin Jocklingson
              Dec 19 at 16:19

              Thank you for your answer. However when you do online trading I do not recall seeing two prices as and sb. I recall seeing a single price plus transaction fees. How do you explain this conflict of data presentation between what you see online and your explanation?
              – Joselin Jocklingson
              Dec 19 at 16:19

              Actually, there are bid and ask rates I suppose, but when I studied mathematical finance and Brownian morons there was a single graph, with bid and ask rates coinciding. Why doesn’t my math book account for both and how do I adjust the theory to make it match.
              – Joselin Jocklingson
              Dec 19 at 16:27

              Actually, there are bid and ask rates I suppose, but when I studied mathematical finance and Brownian morons there was a single graph, with bid and ask rates coinciding. Why doesn’t my math book account for both and how do I adjust the theory to make it match.
              – Joselin Jocklingson
              Dec 19 at 16:27

              0

              That’s a most difficult question to answer as the famous quote says “in short run the markets are like voting machines”. What I have seen is most people try to correlate the stock price movement with the macro or micro events happening around. For instance, if the Indian indices fall then people start to relate it with a rise in crude prices or a rise in the current account deficit. However, on most days, I believe it is very difficult to give exact reasons for why a stock price is rising or falling.

              In long run, the stock prices are weighing machines and the price will follow the earnings of the company. Therefore, you can determine a way in which you can identify fundamentally strong companies and invest in them and identify fundamentally weak companies and short them. You can employ quant techniques to find fundamentally strong and weak companies.

              share|improve this answer

                0

                That’s a most difficult question to answer as the famous quote says “in short run the markets are like voting machines”. What I have seen is most people try to correlate the stock price movement with the macro or micro events happening around. For instance, if the Indian indices fall then people start to relate it with a rise in crude prices or a rise in the current account deficit. However, on most days, I believe it is very difficult to give exact reasons for why a stock price is rising or falling.

                In long run, the stock prices are weighing machines and the price will follow the earnings of the company. Therefore, you can determine a way in which you can identify fundamentally strong companies and invest in them and identify fundamentally weak companies and short them. You can employ quant techniques to find fundamentally strong and weak companies.

                share|improve this answer

                  0

                  0

                  0

                  That’s a most difficult question to answer as the famous quote says “in short run the markets are like voting machines”. What I have seen is most people try to correlate the stock price movement with the macro or micro events happening around. For instance, if the Indian indices fall then people start to relate it with a rise in crude prices or a rise in the current account deficit. However, on most days, I believe it is very difficult to give exact reasons for why a stock price is rising or falling.

                  In long run, the stock prices are weighing machines and the price will follow the earnings of the company. Therefore, you can determine a way in which you can identify fundamentally strong companies and invest in them and identify fundamentally weak companies and short them. You can employ quant techniques to find fundamentally strong and weak companies.

                  share|improve this answer

                  That’s a most difficult question to answer as the famous quote says “in short run the markets are like voting machines”. What I have seen is most people try to correlate the stock price movement with the macro or micro events happening around. For instance, if the Indian indices fall then people start to relate it with a rise in crude prices or a rise in the current account deficit. However, on most days, I believe it is very difficult to give exact reasons for why a stock price is rising or falling.

                  In long run, the stock prices are weighing machines and the price will follow the earnings of the company. Therefore, you can determine a way in which you can identify fundamentally strong companies and invest in them and identify fundamentally weak companies and short them. You can employ quant techniques to find fundamentally strong and weak companies.

                  share|improve this answer

                  share|improve this answer

                  share|improve this answer

                  answered Dec 18 at 11:39

                  Ishan Shah

                  9

                  9

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