Understanding basic market operations

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Understanding basic market operations

Postby Mr. Perfect » Mon Aug 24, 2015 8:12 pm

I stopped doing technical writing on the markets some time ago because nobody really got it and they clung to their indefensible low info positions despite all evidence to the contrary and a complete inability to even be able to to define what they think let alone be able to defend it.

However there may be a teachable moment here. Some of you know about my theory that the finest financial minds in the world are total morons who don't understand anything about their given profession. I learned this by earning the knowledge which I will impart a small sliver to those fortunate enough to read it.

This is not the technical part, but as some of you may have heard the Chinese government is "buying back" stocks in an effort to prop up stock prices. I will demonstrate to you how this illustrates a childlike understanding of market operations by the largest economy in the world.

The theory is that "buying" drives up stock prices and "selling" drives them down. This is laugh till it makes you cry stupid as you will see soon. The amount of buying and selling is always the same, going up or down. Based on this theory the idea is that a government can buy enough stock to prop up prices. This is actual policy from the largest economy in the world. Presumably they've attended some seminars here and there and don't hire people off the street, although it makes you wonder. Anything is possible. But this dumb@$$ POV and the underpinning is widely held by everyone I know, domestic and international.

And it is laughably wrong. The idea is that if you "Buy" a billion dollars worth of stock then you will increase the market cap by a billion dollar. It's laughably brain dead. You people have brain dead lobotomy survivors running crucial aspects of your lives, and you don't even question them. You will pay the price soon.

Here's what happens. Let's say that China pumps a trillion dollars into their markets. Disaster avoided right? They purchased so many billions of shares;

But a stock can drop 10%, 20%, 30%, 40%, 50%, 60%, 70% etc... wait for it... on zero shares changing hands. Share prices can drop (or increase) by a market maker punching in numbers on his screen, in the absence of trading.

This happens every single day and are called "gaps" (pls google, too much typing for me on readily available topic).

So the moral of the story, and there is a lot more to say but hopefully this gets you guys going, is that conventional wisdom is as valid as leprechauns making shoes for you in the night. "Buying" does not prop up stock prices. And absolutely nothing can stop a gap. Nothing.
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Re: Understanding basic market operations

Postby Endovelico » Mon Aug 24, 2015 9:27 pm

Mr.P,

Strictly speaking, you are right. Just buying or selling shares does not have to have any impact on stock's value. But if one is referring to a willingness to buy certain stocks which is greater than the supply of said stocks, then the price will go up. It would be also enough for the Chinese government to indicate to the market its willingness to buy shares at prices higher than the last price quoted for the value of those stocks to go up. I presume that for most people if the Chinese government was buying huge amounts of shares on the stock exchanges, such an increase in demand might be enough to push prices up. But you were right in your comments.
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Re: Understanding basic market operations

Postby Mr. Perfect » Mon Aug 24, 2015 9:34 pm

There are a few things to address in your statements for a later time.
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Re: Understanding basic market operations

Postby NapLajoieonSteroids » Tue Aug 25, 2015 3:45 pm

I dunno Mr.P, even I'm aware of market gaps...this isn't some sort of secret knowledge

Furthermore, it's up to you to prove that market gaps are important to an entity (China, or any nation for that matter) that has a very good nonzero chance of being around centuries from now in some capacity or another.

This is the sort of disconnect you run into in modern baseball stat analysis.
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Re: Understanding basic market operations

Postby Typhoon » Tue Aug 25, 2015 5:05 pm

The current price of a share is the price at which the last transaction between a buyer and seller occurred.

That's the whole point of having an open market: price discovery.

Prices is thus set at the margin.

The bid is the price at which someone is willing to buy the share [E.g., $10.00].

The ask is the price at which someone is willing to sell the share [E.g., $10.05].

Market makers, who are supposed to provide liquidity in a specific share, make their money on the [now often small] difference.

In a market selloff, the bid can and is repeatedly lowered as people are desperate to exit, to sell, at any price and thus the ask price chases the bid price down.

The long delay or absence of a quoted bid by the market makers, for whatever reason, can lead to a complete panic.

The govt can step in and try to support the share price by buying at a specific bid prices, but is eventually overrun by sell orders.

If the govt keeps buying shares, the the govt will eventually end up owning the company, a de facto nationalization. :wink:

Also, anyone who blames short sellers for market declines either simply does not understand how markets work or is purposely misdirecting attention to the usual, yet innocent, scapegoats.
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Re: Understanding basic market operations

Postby Nonc Hilaire » Tue Aug 25, 2015 8:35 pm

I don't think the market has operated like that in many years.
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Re: Understanding basic market operations

Postby Mr. Perfect » Tue Aug 25, 2015 9:01 pm

Typhoon wrote:The current price of a share is the price at which the last transaction between a buyer and seller occurred.

False. It is the bid ask. The last trade has nothing to do with what you pay when you buy or sell publicly traded securities, other than it is a reference.

That's the whole point of having an open market: price discovery.

Prices is thus set at the margin.

The bid is the price at which someone is willing to buy the share [E.g., $10.00].

The ask is the price at which someone is willing to sell the share [E.g., $10.05].

Market makers, who are supposed to provide liquidity in a specific share, make their money on the [now often small] difference.

Thanks to hft.

In a market selloff, the bid can and is repeatedly lowered as people are desperate to exit, to sell, at any price and thus the ask price chases the bid price down.

Not really. This is the fundamental error I am addressing. At every price a transaction occurs the buying and selling is exactly the same.

The long delay or absence of a quoted bid by the market makers, for whatever reason, can lead to a complete panic.

Not at all. A market maker is obligated to fill 1000 shares at any quote at any time. The only way he can affect the trading is by changing the price or changing the spread.

Trading curbs are implemented by the exchange and is a response not a cause of panic.

The govt can step in and try to support the share price by buying at a specific bid prices, but is eventually overrun by sell orders.

Again, this is the error in people's thinking. I stock can move infinitely to the upside and all the way to zero based on 1 trade or mor accurately, one quote. No "selloff" is required.

If the govt keeps buying shares, the the govt will eventually end up owning the company, a de facto nationalization. :wink:

Yes. But, the government is now in the stock business and is assuming the losses.

Also, anyone who blames short sellers for market declines either simply does not understand how markets work or is purposely misdirecting attention to the usual, yet innocent, scapegoats.

True.
Last edited by Mr. Perfect on Tue Aug 25, 2015 9:05 pm, edited 1 time in total.
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Re: Understanding basic market operations

Postby Mr. Perfect » Tue Aug 25, 2015 9:02 pm

Btw the candles on this thing are horrible, it is not over.
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Re: Understanding basic market operations

Postby Mr. Perfect » Tue Aug 25, 2015 9:09 pm

NapLajoieonSteroids wrote:I dunno Mr.P, even I'm aware of market gaps...this isn't some sort of secret knowledge

Furthermore, it's up to you to prove that market gaps are important to an entity (China, or any nation for that matter) that has a very good nonzero chance of being around centuries from now in some capacity or another.

This is the sort of disconnect you run into in modern baseball stat analysis.

I think you completely missed the point. The gap is an example of how pricing really works, not the "buying" and "selling" models that lead to errors the Chinese are making and is constantly referenced by the financial media.
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Re: Understanding basic market operations

Postby NapLajoieonSteroids » Wed Aug 26, 2015 12:29 am

Mr. Perfect wrote:
NapLajoieonSteroids wrote:I dunno Mr.P, even I'm aware of market gaps...this isn't some sort of secret knowledge

Furthermore, it's up to you to prove that market gaps are important to an entity (China, or any nation for that matter) that has a very good nonzero chance of being around centuries from now in some capacity or another.

This is the sort of disconnect you run into in modern baseball stat analysis.

I think you completely missed the point. The gap is an example of how pricing really works, not the "buying" and "selling" models that lead to errors the Chinese are making and is constantly referenced by the financial media.


No, I'm sure I got it, hence the baseball comparison. I'm asking you why the utility of playing gaps is the same for a nation as it is an individual.
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Re: Understanding basic market operations

Postby noddy » Wed Aug 26, 2015 2:49 am

the market tries to market, the gubmint/central banks try and stop it and this works until it doesnt.

simples.
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Re: Understanding basic market operations

Postby Mr. Perfect » Wed Aug 26, 2015 6:58 am

NapLajoieonSteroids wrote:
No, I'm sure I got it, hence the baseball comparison. I'm asking you why the utility of playing gaps is the same for a nation as it is an individual.

I'm not talking about playing gaps, at all, and I know absolutely nothing about baseball statistics.
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Re: Understanding basic market operations

Postby Parodite » Wed Aug 26, 2015 10:13 am

Mr. Perfect wrote:
Typhoon wrote:Market makers, who are supposed to provide liquidity in a specific share, make their money on the [now often small] difference.

Thanks to hft.


I have good memories about our hft discussions in the past, how you missed the point throughout. ;)

As for this topic. Are you saying that what the Chinese gvt is doing will not make any difference ultimately?
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Re: Understanding basic market operations

Postby NapLajoieonSteroids » Wed Aug 26, 2015 3:27 pm

Mr. Perfect wrote:
NapLajoieonSteroids wrote:
No, I'm sure I got it, hence the baseball comparison. I'm asking you why the utility of playing gaps is the same for a nation as it is an individual.

I'm not talking about playing gaps, at all, and I know absolutely nothing about baseball statistics.


Okay. I'll drop the baseball analogy. My points are these:

1) Equity value =/= marginal value but is closer to average value.

2) The stock price is a secondary market price because it is evaluating a company as a whole and not each simple investment marginally.

3) Stock prices are managed by people with complex relations to the stock/transactions themselves. And the influence is bi-direction between these managers and investors/participants- which affects prices- with a whole language of indirect signaling.

4)Regular consumers are conditioned to respond to prices by their own marginal valuation. So they infer that a low or high stock price signals a low or high quality which they will then compare to their own value criterion. They'll know something is up intuitively if the commodity price is too far divorced from the information, but they care about the price and not the information that determines the price.

5) You, and other economic minded individuals, recognize the role the information plays in prices like a gap is crucially important to you or anyone reading a market, like a comma can completely change a sentence for a linguist.

6)Unlike most markets people deal with daily, the stock market and its prices are heavy on indirect signaling [information producing] and light on actual allocation pricing.

7) The media which you say gets it all wrong is not meant for you. Most business media is aimed at people who like the idea of being conversant in markets but have no desire to put the hard work and dedication into actually learning anything about it (even if wildly wrong .)

8)A government's relation to the market is different to you, me, or even Pepsi Cola's. While I wouldn't put it past China, or anyone, to do something stupid in the face of economic troubles; I do not think there is enough information to jump you what you infer from their actions and the burden is on you to prove they read/ought to read the market in the exact same non-governments do.
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Re: Understanding basic market operations

Postby Endovelico » Wed Aug 26, 2015 4:04 pm

Perceptions, not knowledge, is what influences most decisions on whether to buy or to sell stock. Successful traders are those who know how to change/influence those perceptions to their advantage...
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Re: Understanding basic market operations

Postby Mr. Perfect » Wed Aug 26, 2015 5:42 pm

Parodite wrote:I have good memories about our hft discussions in the past, how you missed the point throughout. ;)

Yes. Of all the "debates" I've had with antiintellectuals it was among the more memorable. To have any discussion with people who couldn't even form sentences of their own making in support or opposition of their own causes was spectacular to behold.

As for this topic. Are you saying that what the Chinese gvt is doing will not make any difference ultimately?

In regard to their buyback program yes it is an expensive exercise in futility. It literally will not work.
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Re: Understanding basic market operations

Postby Mr. Perfect » Wed Aug 26, 2015 5:46 pm

NapLajoieonSteroids wrote:
Mr. Perfect wrote:
NapLajoieonSteroids wrote:
No, I'm sure I got it, hence the baseball comparison. I'm asking you why the utility of playing gaps is the same for a nation as it is an individual.

I'm not talking about playing gaps, at all, and I know absolutely nothing about baseball statistics.


Okay. I'll drop the baseball analogy. My points are these:

1) Equity value =/= marginal value but is closer to average value.

2) The stock price is a secondary market price because it is evaluating a company as a whole and not each simple investment marginally.

3) Stock prices are managed by people with complex relations to the stock/transactions themselves. And the influence is bi-direction between these managers and investors/participants- which affects prices- with a whole language of indirect signaling.

4)Regular consumers are conditioned to respond to prices by their own marginal valuation. So they infer that a low or high stock price signals a low or high quality which they will then compare to their own value criterion. They'll know something is up intuitively if the commodity price is too far divorced from the information, but they care about the price and not the information that determines the price.

5) You, and other economic minded individuals, recognize the role the information plays in prices like a gap is crucially important to you or anyone reading a market, like a comma can completely change a sentence for a linguist.

6)Unlike most markets people deal with daily, the stock market and its prices are heavy on indirect signaling [information producing] and light on actual allocation pricing.

7) The media which you say gets it all wrong is not meant for you. Most business media is aimed at people who like the idea of being conversant in markets but have no desire to put the hard work and dedication into actually learning anything about it (even if wildly wrong .)

8)A government's relation to the market is different to you, me, or even Pepsi Cola's. While I wouldn't put it past China, or anyone, to do something stupid in the face of economic troubles; I do not think there is enough information to jump you what you infer from their actions and the burden is on you to prove they read/ought to read the market in the exact same non-governments do.

I have no idea what any of this has to do with the op. And what china is doing can be easily googled.
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Re: Understanding basic market operations

Postby NapLajoieonSteroids » Wed Aug 26, 2015 6:03 pm

Mr. Perfect wrote:I have no idea what any of this has to do with the op.


The super secret insight in your original post is so well known that even I know about it and can go through it chapter and verse- it's conventional wisdom.

If I know about it, those you deride know a multitude more, which suggests that while we sit here saying the whole job can be done with a screwdriver, there is a likelihood they've got a fuller toolkit we're overlooking.

And what china is doing can be easily googled.


So you're telling me to go read the views of the very experts you claim are morons. Interesting.
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Re: Understanding basic market operations

Postby NapLajoieonSteroids » Wed Aug 26, 2015 6:35 pm

There is a time when the equity price should reflect the shares- when a company is newly organized and issues equity as a way to fund its own investments. But does this even happen? There are probably a million other, better ways to do the same thing.
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Re: Understanding basic market operations

Postby Mr. Perfect » Wed Aug 26, 2015 8:43 pm

NapLajoieonSteroids wrote:The super secret insight in your original post is so well known that even I know about it and can go through it chapter and verse- it's conventional wisdom.

If I know about it, those you deride know a multitude more, which suggests that while we sit here saying the whole job can be done with a screwdriver, there is a likelihood they've got a fuller toolkit we're overlooking.

Well it seems certain that you were unable to even cognate the OP. A simple test would be for you to repeat back in your own words what I was saying.

So you're telling me to go read the views of the very experts you claim are morons. Interesting.

There is a difference between reporting facts and opinions. The facts on China are easy to obtain.
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Re: Understanding basic market operations

Postby NapLajoieonSteroids » Wed Aug 26, 2015 9:30 pm

Well, I don't mind being wrong but I sure hate it when I seem wrong.

But I'm confident I am right on the rudiments, and that you've nowhere to go with this thread.

Endo was the second or third post and you've yet to get back to him. I wonder how we cognate* that. ;)

*maybe we start with a cognitive accusative: “He talks a bit talk but...”

Now about China and facts- most of it is way outside my range. But I do know this: like any downturn, everyone is quick to either push their theories or demonize someone else's. I saw professional lucky guy Mark Cuban confidently expound on why it had to be high frequency trading and computers that were melting the economy...and you jus' hafta shrug at that. Because it is the type of thing a certain segment of the population wants to hear, just like they like to follow the little dow arrows up and down and get a sense of grasping the market.

China, some leaders of China, are panicking I'm sure. Even if its a small group with panicky behaviors. A class of bureaucrats especially will create a lot of activity for its own sake, because you can't be caught not busy doing something, even if that something is wasteful or pointless. And how many of them have an understanding (or access to someone) of what is going on? This is all more in line with understanding basic psychological operations though. For myself, I do not really know much beyond the names of the Chinese dignitaries: I do not know who taught them, what their experiences are, which pet theories are preferable...all that information necessary for a better understanding of what's going on in China. And I'm not in economics or finance- so why would I even take a stab?
Yet, I also know its foolhardy to imagine them so dense as to be incapable of grasping basics. If there is a problem, it's at the premise level....Which is why I mentioned people being conditioned to treat stock markets like it were a farmer's market or some sort of shopping choice between retail chains. It's the most basic misunderstanding of how markets operate.
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Re: Understanding basic market operations

Postby Mr. Perfect » Wed Aug 26, 2015 11:41 pm

So you couldn't repeat back what I said.

I'll try to do it shorter.

The theory that buying bids up prices or selling drives down prices ("the bears won today") is idiotic and leads to bad polices like China is currently undertaking, bad for China that is. It won't work and will simply add losses to the national balance sheet.

The evidence of this is the phenomenon of gaps, where large changes in price occur on zero trading. Nowhere did I say gaps were a secret, but many don't understand how they illustrate the real forces that bear on price action. Including Chinese officials.
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Re: Understanding basic market operations

Postby Parodite » Wed Aug 26, 2015 11:44 pm

Mr. Perfect wrote:
Parodite wrote:I have good memories about our hft discussions in the past, how you missed the point throughout. ;)

Yes. Of all the "debates" I've had with antiintellectuals it was among the more memorable. To have any discussion with people who couldn't even form sentences of their own making in support or opposition of their own causes was spectacular to behold.


It was fun.

Mr.P.: "Highways and fast cars are good! They add liquidity and everybody is faster where they want to be!"

Parodite/Nonc: "But there are controversies, issues. Front runners, flash crash questions. People who know things.. have contacts... and always pay less at the pump than others. Who play the system with tricks. Link [url]a[/url] [url]b[/url] [url]c[/url]"

Mr.P: "You just don't get it! Everything is cheaper now, and people get faster where they want to be!"

etc
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Re: Understanding basic market operations

Postby Mr. Perfect » Thu Aug 27, 2015 1:34 am

Parodite wrote:Parodite/Nonc: "But there are controversies, issues. Front runners, flash crash questions. People who know things.. have contacts... and always pay less at the pump than others. Who play the system with tricks. Link [url]a[/url] [url]b[/url] [url]c[/url]"

And you guys were not able to substantiate any of those issues let alone explain them. At all. How can you debate with people who can't even explain their position. You guys couldn't even explain what hft is in your own words. You couldn't even cognate the subject matter.

Mr.P: "You just don't get it! Everything is cheaper now, and people get faster where they want to be!"

etc

When the issue is that simple what else is there.
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Re: Understanding basic market operations

Postby Zack Morris » Thu Aug 27, 2015 4:41 am

I'm amazed Zerohedge was able to hold out this long. It's been, what, 6 years? Not many folks profited on Monday (apart from the HF market makers). Folks have been predicting a sell-off for years now! Any retail investor taking on short positions on Zerohedge doom and gloom would have been crushed long ago. And direction neutral/long vol strategies would not have worked too well either.
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