What makes things move?

strewthmate

Member
71 1
What makes the market move?

Hi, sorry if these questions have been answered in other threads, but here goes. Hopefully this will answer my questions and help out a few other people as well:

In essence I’m trying to figure out what makes shares rise and fall. I know its to do with supply and demand, but who’s supplying and who’s demanding and how does this effect the share price?

Here’s my questions, be careful with your answers cos they’ll probably lead to more questions :)

1. Who are the ‘market makers’
2. What to market makers do
3. Are there different ‘MM’ for shares and futures?
4. May be basic - but could you give a brief description of the process of what makes a share price move (the process).
5. Do the actions of a private investor have any influence on share price at all?

Thanks so much for your time.
 
Last edited:

strewthmate

Member
71 1
I've had no response to my previous question

I'd really appreciate anyone helping me out here. I know it may seem a basic question, but it seems important for me to know whats going on in the markets.
Just answering the first part would be helpful

1. who are the MM?

Thanks
 

oatman

Senior member
2,879 22
In the Glossary:
Market Makers
A brokerage or bank that maintains a bid and ask price in a given common stock by always being available to buy or sell at publicly quoted prices.
 

Airthrey Capital

Well-known member
370 18
In answer to your questions, relating specifically to the London markets, and broadly speaking......


1. Market makers (in equities) in London tend to be the major investment banks such as Morgan Stanley, Goldman Sachs, Merrill Lynch, UBS, Citi, Deutsche Bank etc.....

2. Market makers will quote you a two way price in a line of stock in a certain size. i.e ABC plc 825-850. in 100,000.

This means you can sell up to 100,000 ABC shares at £8.25 per share, or buy up to 100,000 ABC shares at £8.50 per share.

Market makers do not charge commission, but make their profits from the difference between the selling price (the bid) and the buying price (the offer). The differnece is known as the spread. In effect they are trading a "book". An individual employee of an institution working as a market-maker will make prices in a number of stocks, normally within his specialist sectors (i.e oils, financials, tech stocks etc)

Note that you as an individual cannot deal directly with a marketmaker...you will neeed to go through a broker who in turn will deal with the marketmaker.

3. Yes

4. The answer to this question would take several hundred pages to explain....so I will give you the very basics!

Ultimately, prices in equities (and almost everything else), depend upon supply and demand. If there are more buyers than sellers, the price goes up, if there are more sellers than buyers the price goes down.

You therefore need to ask yourself what events would cause people to buy or sell a specific share, and this is why having access to real-time financial (and sometimes non-financial) news is so important to investors, and why you see dealing rooms full of Bloomberg and Reuters screens continually pumping out global news.

Company news

The share price will be affected by news specific to that company. E.g the reporting of its results, the introduction of a new product, the resignation of the chief executive, a takeover approach etc (e.g the recent oil find by Cairn Energy saw its share price surge)

Economic news

The release of official figures such as unemployment, inflation, trade deficits (or surpluses), house prices etc will have an effect on companies and therefore their share prices. For example, if inflation increases rapidly and unexpectedly, interest rates will need to rise. A rise in interst rates will make borrowing by companies more expensive and will effect their profits. Additionally, investors might be attracted to fixed income products (bonds / gilts) and away from equities, thus resulting in a fall in share prices.


Political news

Government instabilty, war, key government resignations will also affect general stock prices. The resignations of Nigel Lawson, Norman Lamont, and the exit from EMU, the Gulf wars are all examples.


In terms of the process of changing prices, remember that in liquid stocks there may be a dozen market makers quoting prices.

Using the example of ABC plc again...

Market maker 1 ...825-850
Market maker 2.....835-860
Market maker 3.....825-850
Market maker 4.....815-840

The "touch" price in the market (best bid / best offer) is 835-840. If you are a seller of stock you would go to market maker 2, if you were a buyer of stock you would go to marketmaker 4.

Market maker 2 is clearly short of stock and he wants more ABC shares. By quoting the highest bid price, he will attract sellers and be able to add more stock to his book. On the other hand market maker 4 is clearly long of stock, and therefore tries to attract buyers with his best offer of 840.

Market makers will continually change and update their quotes depending upon the positions they run, and their interpretation of market news.

Their quotes are disseminated across trading screens across the financial community.

5. If you are a private punter buying 100 shares in Glaxo, the answer is no. When Stock Markets first came into existence, most transactions were done almost entirely by private individuals, Today the volume comes from financial institutions such as pension funds and investment managers. Private client business only accounts for a small portion of business. In a London listed liquid stock (FTSE) you would literally have to deal in considerable size (10's of millions) to have a direct impact on the shareprice.


If however, you were a private punter dealing in futures contracts with a spreadbet sompany (in effect a marketmaker), then you may find that trading £100 / point or more on FTSE will have an impact on their quote.
 

strewthmate

Member
71 1
Thanks Blairlogi and everyone else who replied. Thats really clarified a quite a few things for me

Some more questions though.

1. If Certain liquid stocks have a number of MM offering a variety of spreads, what is the actual price of the stock in relation to a) my broker (eg Barclays or TD waterhouse) and b) the price listed in the FT for example. Is this what you were referring to as the 'touch price'

2. Am I correct in saying that MMs make money for the stocks they are associated with and skim a lot off the top. Or do they have no financial association for the stock (ie not 'employed') they are market making for?

3. Am I correct in saying that pension funds and investment managers are not the MMs, but are the people the MMs are trading too.

Many thanks again.

Hopefully this will be helping a few other newbies as well. :)
 

Airthrey Capital

Well-known member
370 18
Answers to your questions...


1 a) Your broker (e.g TD Waterhouse ) is under an obligation to get you the best price he can from a marketmaker that is available at the time he deals. He will therefore find the highest selling price (bid) if you want to sell and the lowest buying price (offer) in the market. If the touch price in the market is 250-255, TD Waterhouse will sell your shares to the marketmaker for 250 per share, or if you are a buyer, TD Waterhouse will buy them from the marketmaker at 255 per share. The broker will do this on your behalf (you are the brokers client). TD Waterhouse will send you a contract note saying they have bought / sold your shares for 250 /255. Note, they cannot pass a different price to you than what they bought / sold them to/from the market maker. They will however charge you a commission....That's how they (the brokers) make their money. Your broker will always quote you the touch price.

The price you see printed in the FT will be the middle of the touch price at the market close the previous day. e.g if the price quoted by your broker on Thursday close of business is 200-210, the FT will quote 205 in the Friday paper.

2) Not quite sure what you mean,,,,,Can you clarify?


3)You are correct. Pension funds and Investment Managers will also go through a broker. There are however various electronic mechanisms (such as Liquidnet) / ITG Posit), where institutions can match their buy and sell orders anonimously, directly with each other. E.g Standard Life might want to sell 100million BP shares, and they can put this through one of these electronic platforms and hopefully, someone such as the Universities Superannuation Scheme might be on the other side, wanting to buy 100m BP shares. Their orders can be "crossed" at a fixed price, say 600p per share. The benefit is they miss out the middle man altogether and don't pay a spread. So Standard Life sell for 600p per share, USS buys for 600p per share. Both sides are winners, because if they had gone to the marketmakers (through a broker), the touch price would have been 595 - 605. In that case Standard Life would only have received 595 per share (instead of 600), and USS would have had to pay 605 per share (instead of only 600).

Confused?
 

strewthmate

Member
71 1
Thanks again Blairlogie

Not confused, its well explained.

2. What I mean by this is - Each share has a MM or 5, are MMs the entry point to investing in a company? I know MM must be making money on the spread, but what's in it for the associated stock? Do MMs for example know of takeover etc in advance?

Sorry probably being confusing again - basically whats the relationship between a stock and its associated MM?

Thanks
 

Airthrey Capital

Well-known member
370 18
2). No...a marketmaker will not know if a bid is going to be made for the stock (but obviously he can make an educated guess!).


If I am right, your question is more about wheteher there is a relationship between the company (e.g BP) , and the marketmaker (e.g Merrill Lynch). If that is the point of your question, then let me explain.....

Most major Investment banks in the UK will have a Corporate Finance division, and a market-making division.

Suppose a brand new company wants to list on the London Stock Exchange for the first time. The company is called ABC. It wants to list its shares in order to raise new capital (say £100 million). To do so , it will issue some new shares. In this case, it might issue 10 million shares at a price of £10 per share (total of £100 million raised).

ABC obviously need to find buyers of these 10 million shares (remember its shares are not listed on the Stock Exchange yet, and therefore there is no mechanism for any Tom Dick or Harry to freely buy or sell its shares in the market).

In order to find buyers for this new issue, ABC will appoint an Investment Bank (e.g Merrill Lynch) to handle this. Typically Merrill Lynch would "underwrite" the offer. In other words ML would give £100m to ABC plc, and (for a fat fee) would find buyers for their newly issued shares (through their clients such as pension funds, fund managers, private clients etc).ML would probably also agree to make a market in ABC's shares once dealings commence on the Stock Exchange.

Now, in theory, what is known as a "Chinese wall" should exist between ML's investment banking division and their market making operation. These two functions may well even be located in different buildings so as to avoid any confidential information from the Investment bankers (such as the fact that they might be working on a takeover bid on ABC's behalf) getting through to the marketmakers.

Merril Lych's analysts will also regularly produce reports (including buy and sell rcommendations) on ABC plc.

The scandals that occurred on Wall Street during the tech bubble highlighted the big problem between the analysts and the Investment Bankers. Because the Investment banking division had a vested interest in gaining Investment Banking business from their clients, they would continue to produce glowing analysts reports about their client companies, even when they knew that their stock was in fact already overvalued.

I digress from your question, but basically there should be no link between the marketmaker and the company, although in the past there has been dodgy goings on which is now being stamped out, and for which many US banks have now been fined.
 

strewthmate

Member
71 1
Again thanks, that was well explained

I'm still a little confused about what's in it for the listed company. Once they've raised their money, how do they get anything back when it seems all you are doing is buying/ selling off the MM. When I buy say a £1000 block of Barlcays shares am I infact buying them off the MM not the company. Is the share price irrelevant to a company once it has listed? or is it getting money from the continual buying/ selling of stock?


Was I correct in saying that MMs make money from the spread they offer? Is this the only way MMs make money?

This is all answering questions I've had for a long time so I really appreciate all this.
 

TBS

Well-known member
385 0
Other than the fact that the company has a public listing which can affect those that will deal with it, credit ratings, contract bids etc... the company does not get any of the money which you 'invest'. The company only gets the money on initial listing - or in subsequent share/bond/warrant issues.
 
 
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