How current prices is formulated in markets?

External question — Quantitative Finance Stack Exchange Author: TMS Original post: https://quant.stackexchange.com/questions/12775 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I can't understand how immediate prices are formulated in stock & currency (Forex) markets. I have been informed that every tick means one new deal that closed in current price, but this can't be satisfactory explanation for me, because if some bank for example wants to by a huge amount of stocks or some currency, this amount (in general) will not be freely available as a whole in the market in a unified price (as I think), that is, it should be distributed among many owners/traders/investors,also , it is possible that there will be 10 deals of the same tool in the same time with different prices and amounts, am I right? then how the current price is determined?

External answer — Quantitative Finance Stack Exchange Author: Svisstack Original post: https://quant.stackexchange.com/a/12776 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Current price is determinated based on limit orders (passive view on market) laying in order book at exchange. http://en.wikipedia.org/wiki/Order_book_%28trading%29 Incoming market orders are matched against limit orders in book using exchange matching engine (regulations) http://en.wikipedia.org/wiki/Matching_engine

External answer — Quantitative Finance Stack Exchange Author: emcor Original post: https://quant.stackexchange.com/a/12777 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. On exchanges, there is such orderbook with sufficient amount of limitorders, so when you place an order (market or limit), the "best" limitorders for you will be hitted and change the price last traded price. The price you see is actually just the midpoint between the currently best available bid and ask prices in the orderbook. Therefore, this price might be quite misleading if the orderbook is not sufficiently deep and prices change very fast from small orders. If there comes a large block order, all the limitorders that suffice the orderprice will be executed at once and the market price will jump. Usually especially for forex exchanges, the volume of available limitorders is so large that the price change by a single order is rather small. You are correct that there may be the issue of multiple different orders at once. As today's order systems can usually track orders down to nanoseconds, this should be rather an unlikely case but yes may occur. From my knowledge there are various ways in how to handle the order priority in such case, for example the order with the best price (e.g. highest buy-order) would be executed first as it places more value, or the one with highest volume, or some random order. Also see http://www.investopedia.com/study-guide/series-62/trading-securities/priority-exchange-orders/ -- The price is the midpoint between the best available bid-ask (not all limitorders), and yes it does not consider the actual deepness of these limitorders. For liquid assets this is a rather entirely neglegible issue, but for unliquid stocks socalled 'pennystocks', you will almost surely get a 'worse' price than what is shown when you order because the best limitorder is not deep enough and so the second-best order will be hitted (by a market order, for limitorder it will only be partially filled), and so the displayed new 'best price' changes to the next-best available bid-ask midpoint. By looking at the orderbook (which is usually not public for this reason), you may indeed predict the price change from your order. But you can not profit from this prediction, because this price change is caused by your own order (with your own order, you loose exactly the price change, so you cannot profit from it); you may try to manipulate though, by creating some price change which is only through a thin orderbook, to cause fear among other traders who then trade aswell, but it is in general not allowed and orderbook usually not public for this reason. -- The best bid or ask price respectively, is defined as the highest bid (the best available limitorder at which you would sell) and lowest ask (the cheapest available price at which you would buy) of all available limit orders in the order book. By the way, Bid and Ask never cross (in particular $bid<ask$ to avoid immediate arbitrage by selling higher and buying lower), because if an order crosses the best bid or ask respectively, it is immediately filled by that best order which hence vanishes, and the second-best unfilled order becomes the new available best bid /ask respectively). You may look at this public Bitcoin-orderbook: https://www.bitstamp.net/market/order_book You see that only small amount of sellers are willing to buy at high prices (bid), or sell at low price respectively (ask), and in the mid of this lowest ask and highest bid would be the currently displayed price. Note that bitstamp shows its price as the last traded price, while at exchanges it is defined as midpoint of best bid-ask because the latest price might actually be long time ago, while the limitorders are always current. There may be special cases where one would rather use things such as VWAP (volume-weighted-average-price) as displayed price, but for liquid standard assets it would be the midpoint of best bid-ask.