Working Title: The Bid-Ask Spread

This will be a spot for notes which I hope to turn into an essay explaining the vacuous term “market forces” and shining light on cliche, non-explanations of how the stock market works (just the basics).

Once you learn that the market price of a stock (also called an “equity”) is the mean between the lowest ask and the highest bid, and that the underlying process there is that the stock market is a bid-ask system, stock pricing becomes a lot clearer.

Market orders and limit orders sort of balance each other out. Market orders keep a stock “liquid” (i.e. fulfill limit orders), and limit orders are what contribute to a stock’s pricing and price profile over time. The set of all limit orders for an equity can be thought of as two functions, or mountains, or crag-curves, in opposite directions, both monotonic, with the variable changing over the course of the queue being the steepness of the monotonic increase function (for buys which fuels increases in the price) or monotonic decrease function (for sells which fuels decreases in the price) in the stock price. Now, market orders may be either buys or sells, so the real profile of a stock price with time on the x-axis is not monotonic (up or down) but sometimes up, and sometimes down.

Further, the bid-ask system can be thought of as a queue: For bids (limit orders), the highest price is the first sell (market) order executed (at that price), and for asks (limit orders), the lowest price is the first buy (market) order executed (at that price). Further limit orders may be at: the same price, more disparate prices away, or closely spaced to the current limit. Remember: A bid is coupled with a market sell (one party bids on the stock, the other sells it at that bid price), and an ask is coupled with a market buy (one party asks for a set price for the stock, and the other buys it at that ask price). So, limit and market orders together fuel the stock market.

Exercise: Imagine a stock market with only limit orders, or only market orders. What would it look like? Would it function? If so, how?

Figures will be added to a later updated form of this notes, to attain closer progress to the final essay which we hope to be published (somewhere)!

Bedankt voor het denken.

Published by varjakBaby

Clinging, reaching out. Crying wolf when it's reasonable--all the fucking time. No one listens; you may free your ladder from the basement as due to rescue the light on the roof of the night sky. Favorite cheeses, in no particular order: Gouda, muenster, provolone, Havarti, Monterey Jack.

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