I understand how supply and demand works but I’m confused as to who actually is in charge of setting the price to display to all trading platforms. Since the stock price is constant across all trading platforms, what algorithm or system is in place to ensure there are no clashes or discrepancies between said platforms? Is there one dominating platform that monitors all stock prices which other platforms refer to such as the NYSE?
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The price you see is the price at which the stock changed owner. If there were no trades, then the price wouldn’t show a difference.
There are papers which rarely get traded and for those there are thus rarely price updates. Not like major stocks which get traded constantly
Stock “prices” is actually a misnomer. What is displayed is usually “last transacted price”. As long as the transaction is registered and posted, any exchange will have the same information to them.
If a stock “price” says $10, it doesn’t mean that $10 will be the next transaction – a buyer is not guaranteed to be able to buy at $10 and a seller is not guaranteed to be able to sell at $10. It simply means that the last time this stock was traded, it was traded at $10.
The market does not “make up” or “manage” the price – it simply provides the information of what has already happened.
There is no single mechanism to ensure the same price is shown for the same stock across different exchanges. If they are different, arbitrage traders will exploit this discrepancy such that the stock prices will become the same.
Depending on what platform you use, it can show you the prices on different exchanges (Bloomberg for example will do this where there are more than one trading venue).
Now if the prices differ between exchanges/venues, this will be exploited. If you can buy a stock for 99c and sell it on another exchange for $1 the prices are momentarily different until more people try and do that and the price is “arbitraged away”.
This is the case for dual listed stocks, e.g. some that are listed across different European exchanges and US at the same time.
It is possible to buy stock and other financial products on one market and sell it on another. There are several high speed trading companies specialising in exactly this. Whenever an equivalent commodity have different prices between two markets the high speed traders will relay this information between the markets as fast as possible and then trade the commodity until the prices are the same. The margins on this is razor thin as they might do millions of dollars of trades only to earn a few hundred dollars in return. But they do this automatically all day for many different commodities so they can make at least a living wage.
It does however require a lot of special equipment as they need to beat all the other traders. They used to have dedicated fiber optics lines between the markets to make the physical route the shortest possible and so they could install their own low latency equipment. But it have become more and more common to use radio links as these are even shorter then fiber lines.
Imagine you have a toy car that you want to sell to your friend. You decide that the car is worth $10, so you ask your friend if they want to buy it for that price. However, your friend thinks the car is only worth $5, so they don’t agree to buy it. This difference in opinion about the car’s value is similar to how stock prices change.
In the stock market, there are many buyers and sellers, just like you and your friend. When people want to buy a stock, they make bids, which are like offers to purchase it at a certain price. At the same time, others who own the stock want to sell it and make asks, which are like offers to sell it at a certain price.
The stock price changes based on what buyers are willing to pay (bids) and what sellers are willing to accept (asks). When more people want to buy a stock than sell it, the demand for the stock goes up, and the price tends to rise. On the other hand, if more people want to sell the stock than buy it, the supply of the stock increases, and the price usually goes down.
Factors like news about the company, the overall health of the economy, and investor sentiment can affect how many people want to buy or sell a particular stock. When good news comes out, like a company announcing higher profits, more people may want to buy the stock, which can drive up its price. Conversely, negative news can make people want to sell, leading to a decrease in the stock’s price.
In summary, stock prices change based on the constant interaction between buyers and sellers in the stock market. The balance between how many people want to buy or sell a stock determines its price, which can fluctuate based on various factors and changing opinions about its value.
There is no algorithm, and no “one” sets the price. All the prices for each transaction are separate. The sum total of all of the specific trades that happen at a given moment (really, a bit longer) result in the published price. Technically the price you see in real-time should reflect the value of the last trade but so many are made at every instant for most stocks that it might not reflect exactly that latest trade.
The biggest & most active traders are monitoring all of these trading platforms simultaneously and trying to figure out when it might be profitable to buy/sell on one, based on the price on the other one – in addition to doing that analysis for any one specific platform. For the rest of us – a huge fraction if you look at the number of entities trading, but an incredibly tiny proportion of the value of all trading based on the $ amount traded – we see what we see when we see it and make decisions to buy/sell. In essence, the market has moved on in that interval.
Other comments are absolutely correct that the trade transaction price reflects exactly the value that two entities (not necessarily people) who each feel they got the better end of that particular deal. Would you make a trade if you didn’t think you were getting a good deal?
Yes, some marketplaces or “exchanges” see many more trades made than others – for example the NYSE is one of the biggest – and there are many where any entity can choose to trade. One interesting aspect is that each market has different regular hours so that when the NYSE is “closed” the Tokyo Nikkei is open. It’s not quite that simple but you get the idea.
The stock price for any given moment is the price of whatever price has the most trades in that given moment.
The way quoted prices are determined is simple: whatever was the price paid in the most recent trade.
If I see Microsoft quoted at $330, that means the last trade was at $330. If I peer more carefully into my trading platform, I might see a bunch of offers to buy, at (maybe) $330, and also a bunch of prices lower than that. I’ll also see a bunch of offers to *sell* at *higher* prices.
As long as the sellers are all demanding higher prices than the buyers are offering to pay, then no trade takes place. But then maybe I come along, and say “I want to buy 10 at $330.05”. Well, someone’s already offered (let’s say) to sell 8 at $330.05, so as soon as I make my bid, the trade takes place – I get 8 of the 10 shares I want, the remaining 2 go on the list of “offers to buy”, and the quoted price of Microsoft shares is now $330.05.
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You asked how different trading platforms manage to get the same price. They do this, because they are all getting price information from a single source – a stock *market*. Example markets include the NYSE (New York Stock Exchange), NASDAQ (whatever that stands for), and there are also international markets (Euronext, Japan Exchange Group, Hong Kong Stock Exchange, London Stock Exchange etc)
Usually, a company is only listed on one exchange, but sometimes it is listed on more than one. For example, Air New Zealand is listed on both the Australian and New Zealand stock exchanges.
Then, your question “how do they make sure the prices are the same” has an interesting answer. They don’t, because they don’t have to do anything. As soon as the prices diverge, some smart investors will take advantage of the fact that they can buy shares in one market, and sell them at a higher price in the other. As they sell and buy, it pushes the prices towards each other, and so the prices in different markets tend to stay in step.
To understand stock prices, you need to understand that there are two kinds of orders that make up the market. One kind of order is called a limit order it means “I don’t care when I trade, but if someone wants to buy stock from me I’ll sell this a certain number of shares to them at a certain price (maybe 100 share at $50/share). The other kind is called a market order and it means that “I want to buy shares at the best available price right now”.
If you can find a source for a level 2 quote during market hours, you’ll see all the limit orders to buy or sell stock that people have placed to buy or sell stock at any given time.
When a market order to buy comes in the lowest sell limit order sells to them at that price and when a market order to sell comes in the highest limit order sells to them.
When limit orders buy or sell all their stock the next best price becomes the one that’s filled. When new limit orders are placed they get added to the stack sorted by price.
So throughout the day prices bounce between market orders that want to buy or sell, and as limit orders are filled they move up to the next ones. Lots of large market order buying causes all the sell limit orders to fill and prices to rise, and lots of market order selling causes the buy limit order price to fall. Lots of both kinds causes the difference between the two to widen.
There’s actually 3 relevant prices in a stock quote: bid, ask, and last.
Bid is what someone buying shares is willing to pay.
Ask is what someone selling shares is asking for.
Last is the last transaction price that was agreed on.
When you submit a trade it goes to a market which matches buyers and sellers. If you’re buying and it’s a limit order the limit price you set will be your bid price. If it’s a sell then the limit price is your ask price.
If it’s a market price order then buy price will just be whatever the current ask is, or bid for sells.
When there are many orders for the same price it forms a queue of orders at that price, first order to the market gets filled first.
Once shares have been matched to offers, that order is marked as fulfilled, the last price will update, and funds and shares will be transferred accounts within 3 days (the settlement time).
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