From "Dingers"- Intraday Prices...

ChartMan

Legendary member
5,580 46
"I am presently trying to understand the complexities of how trading affects intraday prices. I use a trade analyser which gives real time trades and provides volume information in respect of sold cumulative, bought cumulative and net volume.



I am unable to understand what is probably a basic concept of supply and demand, when the intraday volume of shares sold is higher the price of the share goes up. Likewise if the intraday volume of the shares bought is lower the share price falls. For example on the 5 December 01, the net volume for ARM showed minus approximately 900000 shares indicating that sold shares in ARM exceeded the buy volume by 900000 shares. This gave a resultant price increase of 37.75p on the day with a nice big hollow candlestick confirming this. If a trader had followed the crowd selling and gone short, a substantial loss would have occurred.



I have also recently taken out a subscription for Level 2 data this also indicates very clearly how buy and sell volumes influences the price, which is contrary, certainly to my expectations.



Can anybody please explain why this happens, on what philosophy the computer operates that presumably tunes the share price to volume trend and were does the market maker come in to this?"


Entered for Dingers by ChartMan
 

TBS

Well-known member
385 0
Hi All,

Newbie to T2W, so nice to hopefully be of service. This is a question that is often banded about, but basically the reporting of trade direction in the UK is just a series of guesses, particularly when it comes to the SETS stocks. Sites like ADVFN, III etc are just working on the 'likely' direction, but their best guesses are flawed - seriously flawed. Here is a post i've nicked from 'another place' which sums most of it up.

There are several problems with all of these discussions about why has the price gone down since there were x million buys.

The first main problem is that trades are very often mis-identified as buys or sells by ADVFN and other sites, and unfortunately it is the big trades which stand the most chance of being allocated wrongly, since they are often delayed. Clearly if the odd few million shares fall into the wrong category then already the discussion is doomed. Some sites allocate them better than others, and the Exact Futures link on the trades page is the best I've seen, but at the end of the day it is impossible for anyone to be accurate about buys and sells since as harvester says the LSE does not report the allocation nor even the spread at the time of the trade.

The issues that cause mis-allocation are (a) trades of more than 6 x NMS which are delayed by one or more hours depending on NMS, so when the trade is received it is matched with the current (wrong) spread (b) single protected transactions which could have been placed at any time during the day and it is therefore not normally possible to deduce whether they are buys or sells (c) the fact that spread changes are sent immediately from the LSE whereas MMs have a few minutes to report trades, so when trades arrive the spread may already have changed (d) the fact that "buys and sells" really only has meaning if the other side of the trade is a market maker since what you are trying to do is in effect to establish the MM's book, it is illogical to classify cross trades such as M, X or AT codes since they are not trades between an investor and a market maker. For SETS stocks two further issues come into play, (e) for some stocks the spread is very small and changes frequently so any slight delay in the reporting of trades causes confusion and (f) the fact that AT trades on SETS are not trades with a market maker, they are trades where one party buys and the other sells and none, one, or both of the parties could be market makers, so it is nonsensical to allocate them as buys and sells.

The second main problem is the assumption is that price movements are dependent on the relative proportion of buys and sells. That is not the case. We pay market makers to make a market for shares, and to do that they need to be able to set any price they fancy (subject to market conditions). If they did not have this freedom, there would be cases where they would be unable to balance their books and would end up holding large long or short positions which they were unable to close. So MMs will for instance very often move prices down if there has been a lot of buying. Why? Because they need to encourage profit taking to get some of those shares back. This of course is called "shaking the trees" or manipulation by some, but it is the only possible way that a market can work. If you think of the ideal share, which is so brilliant that everyone wants to buy it and no one wants to sell it, after a very short time MMs would have no more shares to supply to investors and trading would stop, unless of course they are allowed to encourage profit taking by lowering the price.

MMs will often mark shares up or down on announcements when there has been no trading. Why did the price drop when there were no sales? Because the MMs were anticipating sentiment changing.

The third main problem is SETS, which is a totally different way of working to market makers. There are no market makers under SETS, or at least they are not called that, since it is SETS that determines the current spread. Small private investors cannot normally deal on SETS (exception: GNI) and instead deal with "retail service providers" who have to quote a spread which is at least as good as the current SETS spread. RSP trades go through with the normal MM codes such as O. SETS trades go through as AT trades, which are both buys and sells at the same time.

The way that SETS works is that buyers and sellers have two options. They can either request to deal immediately, or wait for the desired price to come up (i.e. specify a limit). Limit trades go onto the order book on the buy or sell side as appropriate, i.e. if an investor wishes to buy his offer will go on the right hand or SELL side of the book and vice versa. Those investors who wish to deal immediately instead get the top price on the order book, so an investor wanting to buy would be dealt against the left hand or BUY side of the book. So the two sides of the book never come together since the top trades are picked off as buyers and sellers arrive wishing to deal immediately.

Anyone using SETS can place offers to buy and sell on it, and the best offer to buy and sell form the spread. Users of SETS can include private investors, institutions, brokers, and market makers, and a SETS trade can happen between any of these categories.

So with SETS the buy/sell idea is totally meaningless. There is no central group of market makers which can be said to have bought more shares then they have sold today or vice versa. Instead, the spread is dependent on people putting bids and offers up on a public order book, and if sentiment is such that in the afternoon people key lower prices in, well, you could have had 100% buys in the morning but the price will still drop.

So apologies for the long post but basically the answer to this and all similar threads is that looking at trades in this way is pretty pointless, and totally futile in the case of SETS stocks.
 

ChartMan

Legendary member
5,580 46
Great post. I think the important thing here is when MM's get short of stock. The stock is in demand= lots of buyers = shortage of stock-EVENTUALLY. So they shake the tree...and out pops the daytraders quick profits...and vice verca. Now you can see how elliot waves get formed...
 

dingers

Junior member
15 2
Thank you TBS,
It’s no wonder that the average Joe gets confused. All along I had been working on the basis that there was some logical piece of software guiding the rise and fall of share prices, which had been developed by some super stockbroker and his IT man.

You must have saved about 12 months of investigation and a lot of headaches.

Its quality information that you were good enough to supply that gives this site the good name that it has.

Great stuff.
Regards dingers
 

Riz

Experienced member
1,266 5
Very useful post, TBS, thanks...it's probably the most asked question especially by inexperienced private investors, also the most naive one...as it's common believe and also a marketing concept that the more buyers around the more the prices go up...

Well apart from the MMs decisive and tricky part in establishing the prices which explained in TBS' post, it may also help to ask oneself at what level the buyers are prepared to buy...

Prices only shoot up when buyers are willing to buy almost at any level...in markets that mostly refers to goods in great demand and short of supply sometimes causing black markets to appear, say for example the oil supply reduced by 1/4 suddenly and imagine the scene...

Of course that usually is not the case in stock markets, in LOG case for example which is asked all over the BBs why more buyers than sellers and price still falling... well to put it simply buyers were not desperate to buy LOG at any level, they were just appearing becuase the price was falling, suggesting after the profit warning the MMs were trying to reduce their exposure...adding the institutions damping them big time, there was no way that the price could rise or even stop falling no matter how many buyers appeared at lower price levels...they were just appearing becuase the price was going down any way...

So it may help to also ask at what levels buyers appear to understand why more buyers than sellers still the price goes down...or alternatively just stop approaching falling shares this way as it doesnt help at all :)

Riz
 
 
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