Anna, I was interested to read your piece on how markets work. The ‘nuts and bolts’ always seem to be skirted over or assumed in other accounts I’ve read, but I’ve always been a bit unsure as to how the price mechanism works. For every seller there must be a buyer, and I couldn’t understand how, in a rapidly falling market, it would always be possible to find a buyer – meaning prices must fall much aster than it appears. If, for instance I have some HBOS shares at £5 and there’s sudden panic – why would someone buy them from me at £4, £3 or £2 . But it seems when markets are falling fast, you can always sell at any point on the way down. I probably haven’t explained that very well, because I’m still a bit bemused by the process! I’d be grateful for a guide to any books or articles that go into this kind of rudimentary ‘idiot’s guide’. Yours, Charlie
Dear Charlie
Thank you for your email and apologies for the delay in responding. For some reason your email ended up in the wrong folder.
The reason you are able to sell your HBOS shares in a market that is falling fast is because the market makers are legally obliged to buy them. The market makers’ role is to sit in the middle between buyers and sellers and absorb oversupply as it comes onto the market. The corollary to that, of course, is what happens when they cannot meet demand and this is when they use market news and world events to manipulate market prices to increase selling or reduce buying.
Some markets do operate on a match basis such as the futures market where it is often called a zero sum game, in other words for every buyer there is a seller and vice versa.
As a starting point I would recommend Reminiscences of A Stock Operator by Edwin Le Fevre and Marber on Markets by Brian Marber (from Harriman House publishers) – he’s a real old lag but very readable. There are literally hundreds of other books and you may find one or two more on the Harriman website.
Hope the above helps.
Kind regards.
Anna
February 22nd, 2009 at 1:10 pm
Hi Anna, I found your website very useful and I read it a lot.
When I came accross the Market Makers topic, I realised it is very important.
I am trading in London Stock Exchange, and I was wondering if the shares I am trading (BKIR) has Market Makers or they are working on SETS system? (because I understood by your text that it must be either one or the other).
Is it possible if they have Market Maker and SETS?
Sorry I write here but I do not know how to post a new message.
Thank you very much endeed for your website and advices.
Yours, Santiago.
August 13th, 2009 at 11:06 am