Supply and demand in stocks?

This is a discussion on Supply and demand in stocks? within the Technical Analysis forums, part of the Methods category; Originally Posted by SanMiguel For example, everyone knows the support is at 90, in theory that should just be ripe ...

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Old May 29, 2010, 9:31am   #11
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Re: Supply and demand in stocks?

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Originally Posted by SanMiguel View Post
For example, everyone knows the support is at 90, in theory that should just be ripe for the taking of people's money by the institutions but I guess the fact there are buyers there means that the price cannot get pushed down too much? I suppose the institutions would be buying there as well hence the support?
You've no doubt heard of stop running, which is basically institutions looking to profit by triggering standing orders at key S/R resistance levels.
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Old May 29, 2010, 4:16pm   #12
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Re: Supply and demand in stocks?

SanMiguel started this thread
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Originally Posted by Rhody Trader View Post
Don't forget that technical analysis is not the only driver of stock purchases and sales. There's fundamentals as well. If a fundamental trader figures XYZ is worth $100 then he is going to tend to want to buy at a price below that which offers them a perceived good return. Even within a TA view you have to also account for the fact that folks operate with various time frames and strategy approaches.
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You've no doubt heard of stop running, which is basically institutions looking to profit by triggering standing orders at key S/R resistance levels.
Sure, which is why price usually pushes past an obvious level and then bounces but why the bounce - because all the stops are being hit? You'd think if stops were hit it would push through even further.
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Old May 31, 2010, 4:07pm   #13
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Re: Supply and demand in stocks?

SanMiguel started this thread For example, many buyers went long at 90. After price moves in their direction a reasonable amount, they move all their stops to break even.
The next trading day, price returns to 90 and the institutions drive the price to 89.5 to hit the stops. The stops are sell orders so why does the price then bounce upwards from the support?
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Old May 31, 2010, 4:30pm   #14
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Re: Supply and demand in stocks?

Once the sells are filled, we would possibly see consolidation around 89.5, not a V-shaped single bottom, but the trader who has been throughout or who is now in cash would probably see the pattern as a pull-back of some description in a good uptrend and try to get in long.
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Old May 31, 2010, 5:32pm   #15
 
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Re: Supply and demand in stocks?

Good question.

First thing you need to realize is that physical commodities, futures and stocks all have different supply and demand profiles.

With physical commodities you can only buy what actually exists (fraud aside). You can't buy oil that doesn't exist any more than you can buy a toaster that doesn't exist. Of course, we don't trade physical commodities in our spheres but we do trade commodity futures in which case the amount of contracts traded is not in any way limited by the amount of the underlying physical commodity available.

The number of contracts traded is limited by the matching of buyers and sellers. If you want to buy a contract and there is no-one willing to sell you a contract, then in the futures markets, you wont be getting filled.If you want to buy, the supply side is someone that is willing to sell. The seller may be someone that brought a contract at a lower price or it may be someone that is not currently in the market. In the first case, no new contract is created in the second case, a new contract comes into existense. So we have 2 things to consider - the total amount of open contracts (open interest) and the availability of a buyer/seller to take the other side of the trade you want to place.In my opinion, the number of contracts available is not really part of the 'supply' dynamic per se as new contracts can be created as long as a buyer and seller agree. Saying that - extremes of the number of contracts on the high or low side could be indicative of something being afoot. Whilst there is a supply of open contracts, on most days it's not going to be a major force in the price move.

With stocks, it's a different dynamic. Like futures, we have both the dynamic of buyer/seller availability as well as the number of shares which is similar to open interest/number of contracts. Unlike futures, the number of shares available to be traded (float) is a critical part of the equation. With stocks, there is a finite supply of shares. When a company does an IPO, you may be suprised that they often release a very small percentage of the total shares created to be traded on the exchange. They keep a lot for themselves, their underwriters, that chick in the massage parlour etc.

There is also the fact that institutions buy and hold large percentages of the available shares which means they are not available to be traded every day. 95% institutional ownership of an S&P500 company is not at all uncommon. So - we end up with a limited supply of shares available to be traded at times. The process of accumulation is intended to take advantage of this. By quietly buying up shares, the supply of available shares becomes low and this has the effect of causing the price to rise. Simple supply and demand.

The availability of shares is just one side of the equation. There is another side and that is the availability of buyers/sellers at any specific price level. Stocks are different in that we have market makers/specialists who act as buyers/sellers of last resort. In normal circumstances, it is their job to take the other side of the trade and so there is almost always a person to trade with. This does have it's limitations so the dynamic is a blend of a regular availability of buyers/sellers with a sort of insurance policy buyer/seller of last resort who has some guidelines to give you a 'fair' fill but who will jump out of the way if things get too hot.

Forex and Bonds are not my area at all - but I would imagine each has unique characteristics.

Supply and demand dynamics are different with different markets and this will of course have a bearing on the personality of that instrument in my humble opinion.
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Old May 31, 2010, 5:38pm   #16
 
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Re: Supply and demand in stocks?

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Something a lot of folks don't understand is that prices actually tend to move most aggressively in the absence of available opposing orders. For example, all it takes for prices to fall very quickly is for prospective buyers to pull their bids.
Bingo !
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Old May 31, 2010, 6:49pm   #17
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Re: Supply and demand in stocks?

SanMiguel started this thread
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The availability of shares is just one side of the equation. There is another side and that is the availability of buyers/sellers at any specific price level. Stocks are different in that we have market makers/specialists who act as buyers/sellers of last resort. In normal circumstances, it is their job to take the other side of the trade and so there is almost always a person to trade with. This does have it's limitations so the dynamic is a blend of a regular availability of buyers/sellers with a sort of insurance policy buyer/seller of last resort who has some guidelines to give you a 'fair' fill but who will jump out of the way if things get too hot.
As they did in the recent crash pulling the bids despite being "in charge" of providing liquidity.

I think I was trying to get across the question of why support exists at a particular level.
Without a chart showing support at 93, how or why would the buyers come in at 93 again. The market maker is just there to fill their order and sell to them regardless aren't they?
Assume the institutions stop hunt the 93 level, what would possibly make buyers come in there again if all the stop hunts were SELL orders closing their original longs from 93 at break even.

Actually, that brings me onto a separate question, if everyone wants to sell pushing the market down and the market maker HAS to buy, don't they lose on the transactions or do they underwrite it in the market?
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Old Jun 1, 2010, 2:57am   #18
 
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Re: Supply and demand in stocks?

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Originally Posted by SanMiguel View Post
As they did in the recent crash pulling the bids despite being "in charge" of providing liquidity.

I think I was trying to get across the question of why support exists at a particular level.
Without a chart showing support at 93, how or why would the buyers come in at 93 again. The market maker is just there to fill their order and sell to them regardless aren't they?
Assume the institutions stop hunt the 93 level, what would possibly make buyers come in there again if all the stop hunts were SELL orders closing their original longs from 93 at break even.

Actually, that brings me onto a separate question, if everyone wants to sell pushing the market down and the market maker HAS to buy, don't they lose on the transactions or do they underwrite it in the market?
I think the answer is "it depends". If someone has a large buy order to fill at a price point, then that will effectively act as support. So - in this case, over a relatively short period, the support will be definite and unsurmountable until those orders are filled.

If you consider a longer time frame, and an accumulation scenario. It's a different story. If the supply of stocks on the market has been constrained, then there is absolutely no reason to think there will be enough supply at a point of resistance to stop the up move that occurs as a result of the accumulation.

As for MMs losing money - sometimes they do, sometimes they don't. Overall they come out on top because their very existence on the order book moves the stock. Whenever I'm in a trade and UBSS come along, I know the price is going to shrink away from them. The fact that they are there showing an inclination to sell but are actually buying gives them quite an edge.
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Old Jun 1, 2010, 10:09am   #19
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Re: Supply and demand in stocks?

For price to make an uptick all the offers have to be consumed by a buyer, so that the next place he can find sellers to buy from is one tick(or however far?) up
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