Stop-loss is merely a special form of limit price and would certainly fit into a end of day clearing/settlement process for supply and demand. Here I don’t see where the multiple clearing prices can emerge due to stop-loss orders but not from other limit orders. And, even if there is a spread between the limit bid/offers that might produce a gap, so indeterminate price in that range, it would be rare where the market price orders were insufficient to close the gap.
The fact that the end of day price might be above or below the price you will trade at is not different if it’s end of day only or tick-by-tick. If no one was willing to sell at your bid or buy at your offer you are not part of the market in that period of time. That is now we think markets should work. The concern here seems related to my next paragraph.
One thing that has motivated my musing here is the market argument about maximizing surplus generated by markets—the area between the supply and demand curves. End of day trading allows those two curves to be known and match the trades that allows that maximum surplus to emerge. Random trades as they show up throughout the day does not. Some of the trades my well be pure transfers generating zero surplus.
I do think it’s fair to ask is the lost of surplus is meaningful and I’m not 100% sure. But if not then there is a lot of welfare economics that needs to be rethought and a certain amount of market philosophy to reconsider. Is a society just as well of under the standard free market outcome with producer and consumer surplus as it is under a regime of perfect price discrimination (i.e., only producer surplus)?
Yes, other orders which are conditional on the price can also result in the market clearing price being undefined.
How do you determine what price to trade at? Is it the market clearing price with lowest/highest volume?
I don’t see how you’ve explained how batching transactions is positive-sum; would it reduce transaction costs? Would it somehow provide net benefit to both buyers and sellers as compared to executing trades as they can be, rather than randomly benefiting some buyers at identical cost to the sellers?
Would the magic surplus be greater if trades were only executed quarterly, or if they were executed hourly- why daily, and not more or less frequently? It’s certainly a solid Schelling point, but the math doesn’t care about when NYC wakes and sleeps.
We’d have to look into the specific rules here. The only thing I do know is limit orders trade before market orders do and orders are time stamped. In other words, the current institutional structure is more about managing order flow than establishing the clearing price when supply and demand are considered in the larger context—such as buyers and sellers who want to participate today but will be sending the orders at much different times during the period the market is open.
Draw a simply Supply and Demand picture, and assume those curves do represent the true price quantities of the market participants that exist during the given period. The intersections would then be the standard economic model clearing prices. Let those curves represent one day.
Currently, under the order flow regime, the when ever the orders come in at attempt to find a matching order on the other side occurs. But that would allow a supplier that has a price in the supply curve that is above the intersection to be pairs with buyer on the demand curve that is at or above the ask price.
The difference between the transaction price and that implied market clearing price when considering the days actual supply and demand characteristics seems to represent the loss of value the buyer would have saved if they could have bought at the theoretical market clearing price, which is only known when the day closes. This also represents a transfer to the seller with the above market price. This seller, on some pretty standard market logic, really should not have been able to get that trade as the price asked was too high.
Changing the rule about matching trades (supply and demand) at the end of the day rather than as the orders come in prevents that type of inefficient pairing of buyer and seller.
To my knowledge that is what happens in the morning for all trades, and why sometimes when unusual events occur the opening for a security is delayed while the market or market makers try to figure out just where the open clearing price really is.
Large institutional and large investors will also use some slightly different orders and pay something or an weighted average price for the shares they sell on a give day. This appears similar to my suggestion and I would suggest lends support to the underlying thought.
You are correct that the duration of the period might matter and a day may not be the right one. I picked that because generally information is fairly consistent over a day so revision to orders places should me small.
I don’t understand either of these points.
Stop-loss is merely a special form of limit price and would certainly fit into a end of day clearing/settlement process for supply and demand. Here I don’t see where the multiple clearing prices can emerge due to stop-loss orders but not from other limit orders. And, even if there is a spread between the limit bid/offers that might produce a gap, so indeterminate price in that range, it would be rare where the market price orders were insufficient to close the gap.
The fact that the end of day price might be above or below the price you will trade at is not different if it’s end of day only or tick-by-tick. If no one was willing to sell at your bid or buy at your offer you are not part of the market in that period of time. That is now we think markets should work. The concern here seems related to my next paragraph.
One thing that has motivated my musing here is the market argument about maximizing surplus generated by markets—the area between the supply and demand curves. End of day trading allows those two curves to be known and match the trades that allows that maximum surplus to emerge. Random trades as they show up throughout the day does not. Some of the trades my well be pure transfers generating zero surplus.
I do think it’s fair to ask is the lost of surplus is meaningful and I’m not 100% sure. But if not then there is a lot of welfare economics that needs to be rethought and a certain amount of market philosophy to reconsider. Is a society just as well of under the standard free market outcome with producer and consumer surplus as it is under a regime of perfect price discrimination (i.e., only producer surplus)?
Yes, other orders which are conditional on the price can also result in the market clearing price being undefined.
How do you determine what price to trade at? Is it the market clearing price with lowest/highest volume?
I don’t see how you’ve explained how batching transactions is positive-sum; would it reduce transaction costs? Would it somehow provide net benefit to both buyers and sellers as compared to executing trades as they can be, rather than randomly benefiting some buyers at identical cost to the sellers?
Would the magic surplus be greater if trades were only executed quarterly, or if they were executed hourly- why daily, and not more or less frequently? It’s certainly a solid Schelling point, but the math doesn’t care about when NYC wakes and sleeps.
We’d have to look into the specific rules here. The only thing I do know is limit orders trade before market orders do and orders are time stamped. In other words, the current institutional structure is more about managing order flow than establishing the clearing price when supply and demand are considered in the larger context—such as buyers and sellers who want to participate today but will be sending the orders at much different times during the period the market is open.
Draw a simply Supply and Demand picture, and assume those curves do represent the true price quantities of the market participants that exist during the given period. The intersections would then be the standard economic model clearing prices. Let those curves represent one day.
Currently, under the order flow regime, the when ever the orders come in at attempt to find a matching order on the other side occurs. But that would allow a supplier that has a price in the supply curve that is above the intersection to be pairs with buyer on the demand curve that is at or above the ask price.
The difference between the transaction price and that implied market clearing price when considering the days actual supply and demand characteristics seems to represent the loss of value the buyer would have saved if they could have bought at the theoretical market clearing price, which is only known when the day closes. This also represents a transfer to the seller with the above market price. This seller, on some pretty standard market logic, really should not have been able to get that trade as the price asked was too high.
Changing the rule about matching trades (supply and demand) at the end of the day rather than as the orders come in prevents that type of inefficient pairing of buyer and seller.
To my knowledge that is what happens in the morning for all trades, and why sometimes when unusual events occur the opening for a security is delayed while the market or market makers try to figure out just where the open clearing price really is.
Large institutional and large investors will also use some slightly different orders and pay something or an weighted average price for the shares they sell on a give day. This appears similar to my suggestion and I would suggest lends support to the underlying thought.
You are correct that the duration of the period might matter and a day may not be the right one. I picked that because generally information is fairly consistent over a day so revision to orders places should me small.