Hi, can someone explain this to me please? ECNs are part of the "interbank", right? That is, I see actual quotes from banks and other traders etc., though the liquidity I see will be limited to the amount the participating bank chooses to display to the particular broker I'm with.
Let's say there is 100 million offered over 10 pips on an ECN. I put a 100 mio market order in and consume all that liquidity, moving the offer up 10 pips. Let's assume for the sake of argument that the bid follows suit, maybe because people think it's a genuine move, so we get a normal spread bid/ask 10 pips higher than it was before. I've moved price 10 pips higher. Who sees this higher price? The people/banks who get my broker's feed, presumably. Now it is my understanding that, as there's no central exchange or single market maker, the price that the various banks and market makers etc are bidding or offering at is kept pretty much the same as each other via arbitrage.
So what would happen to the currently out of whack feed that my broker is displaying? Would it immediately get arbitraged away by programs/people selling to the new high bid and buying at the current normal (low) offer and wait for the prices to line up again (this is my understanding of arbitrage - I'm not clued up on it so may be wrong)? Or would other banks see the high price and start raising their bids/offers, thinking they're offering cheap because it's gone high somewhere else? Or would they somehow know that that price is "wrong" and just short it if they can?
Basically I'm trying to understand how big buying from one or a few banks would raise the price for everyone. I get the "hot potato" effect but I'm not sure this explains it.
Thanks.
Let's say there is 100 million offered over 10 pips on an ECN. I put a 100 mio market order in and consume all that liquidity, moving the offer up 10 pips. Let's assume for the sake of argument that the bid follows suit, maybe because people think it's a genuine move, so we get a normal spread bid/ask 10 pips higher than it was before. I've moved price 10 pips higher. Who sees this higher price? The people/banks who get my broker's feed, presumably. Now it is my understanding that, as there's no central exchange or single market maker, the price that the various banks and market makers etc are bidding or offering at is kept pretty much the same as each other via arbitrage.
So what would happen to the currently out of whack feed that my broker is displaying? Would it immediately get arbitraged away by programs/people selling to the new high bid and buying at the current normal (low) offer and wait for the prices to line up again (this is my understanding of arbitrage - I'm not clued up on it so may be wrong)? Or would other banks see the high price and start raising their bids/offers, thinking they're offering cheap because it's gone high somewhere else? Or would they somehow know that that price is "wrong" and just short it if they can?
Basically I'm trying to understand how big buying from one or a few banks would raise the price for everyone. I get the "hot potato" effect but I'm not sure this explains it.
Thanks.