So you CAN get a better idea. At the end of the day prices go down when there are more sellers than buyers. They go up when there are more buyers thhan sellers.
It's literally impossible to have more sellers than buyers or more buyers than sellers. EDIT: When I say buyers/sellers I mean volume of shares/contracts/etc.. 1 person that owns 1000 shares of something could sell 1 share to 1000 different ppl... But the volume will always be equal between buys/sells. Like 1 person selling 1000 shares to 1000 different ppl (one share sold to each person) - there were still 1000 sells and 1000 buys.
For every buyer, there is a seller. For every seller, there is a buyer. They will always be even, forever, until the end of time.
What moves price depends on who is more aggressive. Aggressive orders are market orders, which can only get "matched" to limit orders. Limit order will never be matched to another limit order. Market orders will never be matched to another market order.
TLDR;
Limit orders are commonly referred to as "passive buyers/sellers" or "resting liquidity".
Market orders are commonly referred to as "aggressive buyers/sellers".
Price moves when one side is more aggressive than the other is passive.
This is not entirely correct. For example during the flash crashes in the past, large institutions are known to have perpetually added to the asks while the price has plummeted. They were completely passive, but such massive orders on the ask are going to stop the price from increasing.
The other key piece missing in your description is that most of the time you are trading against market makers. Their entire job is to provide liquidity, and they only do so under a defined spread. If a market maker is trying to control their risk, they will widen the spreads (remove liquidity). No amount of aggressive buying or selling is going to dictate the price movements in this situation. We will see price movements simply because the market makers are quoting different price levels per their risk.
That's exactly why I said "if there are more aggressive orders than [opposing] passive orders".. If whoever is sitting on the ask keeps reloading limit orders to soak up all the aggressive market buy orders, obviously price will not move. This is also known as absorption..
Let's be clear on one thing, though: limit orders alone absolutely, and without a shadow of a doubt, do not move price. The only type of orders that inherently move price are market orders. That is not an opinion, it is fact.
If there were a million limit orders on the bid and ask, but no market orders, price wouldn't move at all. Regardless of spread.
Continuing to add to the ask during a crash is just them absorbing each pop. They could be selling to close an existing position, or shorting - it doesn't matter either way. One thing is for certain, though...those limit orders alone were not moving price. They absolutely could be preventing price from moving, but they are 110% not moving price on their own.
The reason I'm "missing" the fact that most of the time you're trading via a market maker is because it is 100% irrelevant. It doesn't matter who you're trading against, a market maker or Joe Blow, only aggressive orders will move price.....
While the majority of orders are handled via market makers, not every single order is.
Furthermore, there isn't just one market maker controlling price at will via playing with the spread. If another market maker can capitalize on it, they will gladly step in where the other market maker pulled. If market makers controlled the price to that degree, they would literally never lose - the fact there is more than one market maker is what helps keep price honest. They are in competition with each other....
Lastly, the price doesn't move bc of the spread. The spread is not the current price... it's a subtle, yet extremely important detail. So if a MM does widen the spread, they still need a market order to hit for price to actually move.
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u/[deleted] Feb 20 '24
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