Question on how price moves

Come on, they are either executable or not. The platforms I listed are ESP 100% of the time. Some of them also provide different types of access if I recall correctly (RFQ for example).

To make it easy: yes.

the price is unpredictable so we can have any information for it

Ask your broker for a quote in 200 million that would give you an idea. If you hit a platform you will spook the market and move the price. Banks also have a few seconds to reject trades.

How do you know those venues offer executable prices ?

What about currenex ?

Depending on the market, you'll usually get better pricing via a discriminate market order. When you pre-communicate with a dealer about your intentions to trade with size, the quote he/she will give you will be at a substantial price concession. This is true because your order is going to throw off his inventory, i.e. you will adversely select the side on which he trades (you will push him into DD because prices will change [as a consequence of your order] before he can balance his inventory on the other side of the market). And all the ripple effects ensue.

Some markets favor the market makers via a uniform pricing rule i.e. if price is @ 100.00 and I want to buy 50M of Yen, The effect on the available liquidity would push price up to 100.10. The price I would pay for all that liquidity would be 100.10, instead of the average price of 100.05 in a discriminatory pricing based market(assuming there was liquidity at each level in between.)

The futures market employs a discriminatory pricing rule, and so does the FX (I'm pretty sure anyways)..Just some trivia.

Like others around here have rightly said, even a discriminate electronic market order will be slipped nowadays because the algo dealers will cancel their limit orders micro seconds after they see prints on the tape (consumption). Because they are super low latency computers, they can then immediately repopulate the order book at their adjusted new prices/sizes and he who offers first in the que trades first.

Just wanted to mention that when you hear traders talk about 'mis-pricing,' they are talking about when a dealer or dealers adjust their prices by mistake when they believe adverse selection risk is immanent while it's really not.

For instance if a dealer trades with someone who he believes is informed, or if he believes informed traders are present he will adjust his quotes up or down depending on the side the informed trader is trading. Say for example his bid is taken out in one fowl swoop, while the market has been dropping. The trader who submitted it is just a utilitarian trader (uninformed), but the dealer takes him to be informed and lowers his bid below the market and improves the ask price by putting his newly acquired inventory there so he can get rid of it quickly. Lets say other traders see this and they do the same thing. All of a sudden you have a situation where liquidity providers have mistakenly offered a lot of cheap liquidity. What happens on the chart?--for you to answer.

One of the most interesting things I've learned in all my studies is what an 'informed trader' really is. I won't spoil it for any of you, but it's almost comical. If you know who is 'informed,' and when they trade, just trade with them. It's the only surefire way to trade, unless of course you can become informed yourself .

Hi Scotty,

This post about mispricing has been on my mind a bit. I've always wondered about mispricing, at least ever since reading Gaston's profile. I couldn't imagine how you could tell if a pair was mispriced - the price is what it is, and it supposedly has all known (and expected) fundamental information priced in. So when it moves, how do you know that it hasn't merely moved to reflect new fundamental information/expectations however slight? After all if it's mispriced, it has to be mispriced in relation to its true value. And how is that true value determined? Certainly not due to technical factors, so it must be the fundamental factors, i.e. economy, interest rates. So to determine true value, in order to know when a pair is mispriced, you'd have to somehow calculate what it should be worth according to all known fundamentals and expected future fundamentals. This would be an impossible task for me and I'm sure that's not what Gaston does.

I've never really thought of the concept of value - as I said above, I've always vaguely thought of value as being whatever price currently is, reflecting all the millions of perceptions of value from traders and institutions all over the world. If the market were efficient (by which I mean all known and expected fundamental information already priced in), two things come to mind.

First, a lot of people's expectations of fundamental info is wrong; the priced in expectations are wrong, and when the info comes out, price is adjusted - sometimes quite sharply - to the correct fundamental value (at least until we find out that other priced in expectations were wrong, and the market adjusts again). This to me is one possible example of "mispricing", though I have no idea if that's what he meant (I don't think it is).

Another thought along these lines is that when price overshoots its fundamental value after a sharp correction (like after big news), it will often come back down in short order, at least part of the way. My impression is that some news traders fade the spikes, possibly in the assumption that price has over extended itself due to emotional trading, late news/momentum traders in low liquidity, etc. They might consider the market "mispriced" - however you can't "know" that it's mispriced unless you also know its true value; they would have had to take the unexpected news value and plug it in to their formula which would tell them what the true value should be and that the market is currently over extended, and I doubt they did that.

Second, and this is the one I'm thinking about more: if the market is efficient in regards to known and expected fundamentals, it shouldn't be as volatile as it is. Once a news item comes out, it should get priced in and the price should stay where it is until the next news item comes out. Sure there may be small local news items coming out every minute but if they have any effect I can't imagine in general more than a few pips up and down here and there. So in general I would expect a price chart to look more like this:

http://i36.tinypic.com/xbij9z.gif

rather than the constant up and down, 20 pips up one way, 50 down the other, without any new fundies to be reflected in price. So where is this volatility coming from? First of all we have utilitarian traders as you said, doing business. Their large trades will push price one way and the other, creating volatility. If you knew true value, and you knew price was not currently at that value (range) because you just filled a large client order which pushed price away, you could presumably fade that move. Then you have speculators who I believe (I'm not sure... I think I read it somewhere) account for a large proportion of the volume in FX. Lots of them are technical analysis traders and sometimes their TA will cause significant flow away from the pair's true fundamental value. This would be another case of mispricing. For example say price is in a range, then a bank pushes price outside the range to open up a "liquidity pool" as DS calls it, but there are enough breakout traders and covering shorts etc to keep pushing price up. However the "true value" of the pair hasn't changed, so currently the pair is mispriced, and without any new bullish fundamentals you'd be looking to short the pair. Of course it could keep going up and up, which is now making me think of a stock market bubble, but then again this isn't stocks, it's countries' currencies and it's less the common people buying en masse and more the few with the very big money that determine its value... I think. Either way I'm thinking more short term, small fluctuations from true value, uninformed i.e. momentum/breakout traders moving it along, then it stalls as three is no "real" reason for it to be there and those who wish to buy have already bought, and then those who know the true value short it and return it to its proper value. Then you also have other factors that can temporarily prevent the pair from moving to its true value, such as option-related activity, maybe central bank activity. In short, I'm thinking of true value as a line and utilitarian/TA traders as noise disturbing that line which can be faded.

Of course I'm still left with the problem of knowing its true value. In my fake chart above, I'd say the true value was the flat levels, then it moves to its new true value, stays there until new information is factored in and it moves to its new true value, etc. Without using fundamentals, I don't know (even using fundies, I don't know) how to tell what its true value is. But what made me write this post was reading another post suggesting that true value is where price has been trading at the longest (for a given period of time). By which I mean, for example, if it's ranging somewhere for awhile, then that range would currently be its true value. In that case when price breaks from that area, it's either moving towards a new value area where it will stay awhile, or it's just moving due to uninformed order flow and will be reversed. I don't know, but it got me thinking and I guess that's good. Or am I completely off?

BTW Scotty I don't know how you'd know that the liquidity providers are offering liquidity cheaply unless you knew what its price "should" be... I suppose you know how to tell?


(Maybe I'm saying something super basic but to be honest this post is pretty much the first time I've thought of actual value. I actually intended to write something else but this rather lengthy thing is what came out. If I said anything ignorant about fundamentals, it's because I know next to nothing about them.)

Hey Eurotrash

im going to say one thing but leave this to Scotty as hes the expert here

Interms of value - there really is no true value as you put it - only what people are prepared to pay at any given time. The percieved value of the market at any given time will be the price you see. (or should be) This is what I think Scotty is getting at where perhaps the Dealers adjust their price based on what they "think" is happening (protecting themselves from losing to an informed trader) when really something else is happening (trader is not really informed) and they have therefore mispriced there quotes.

So there is no TRUE value only Percieved value of all participants at any given time - This percieved value will be the main factor in peoples decisions to buy or sell and therefore what prices the dealers offer.

In all the madness and competion for liquidity as well as the FX market functioning without profit motivated traders i.e normal consumer and business transactions for purchases of good and services in foreign currency the price will adjust based on the supply of liquidity at the time.

Also don't forget news has an influence before it is released based on expectations, a news released may be "priced in" to the market well before it is released based on these expectations or perhaps other realities.

Hope I havent dumbed down this thread - cant wait for Scottys answer to your question.

I have a question for Scotty as well:

Even if you knew who the informed traders were - How on Earth are you meant to know when they're trading? The only thing I can think of is option expiry days or on schedualed news releases. This has always baffled me

BTW your post has given me the urge to blow the dust off my old Larry Harris book. You always seem to remind me of how much I have to learn.

Cheers

Hi Cindy,

What you said about value is pretty much what I thought - or used to think. Now I'm not sure. However if value is what price is, how can the market ever be mispriced? I mean sure ok a dealer thinks an informed trader is informed, and adjusts his prices. In Scotty's example everyone adjusts their prices. That means the new price is the new value, even if it was arrived at for the wrong reasons. So how could you or anyone else know it was mispriced unless there was such a thing as a "correct" price - which I'm calling its "true value"? Maybe the bank that originally took the order and moved price comes to the conclusion that it wasn't an informed trade as no one else is following suit, so they move prices back up - but I don't think so.

I see what you're saying but I think theres a diffrence between what the price is RIGHT NOW and the percieved "true value" of the market.

Example: Price right now on EUR is 1.3000 yet one group believes this is underpriced and a second group of traders think this is overpriced -

These 2 groups will trade as group 2 will gladly sell to group 1 and in the end only one of these groups will be right...

The person in the middle of this is the dealer, if the dealer can't exchange the right volume equally (i.e group 2 wants to sell more than group a wants to buy) then the dealer will have to make up the difference with their own inventory and at the same time make a call as to which group is informed and adjust prices accordingly.

This means the Dealer will also have their own "percieved value" and in the end no one is right or wrong but the supply and demand of the market.

The "right" price can only be know in hindsight (?) but the effects on liquidity of the dealers actions (when wrong) I am guessing can be seen in real time

This is my take on it anyway

EDIT: The dealer only needs to make a call if one of those groups makes an order big enough to imbalance their inventory supply - in this case the dealer will assume the trader is informed and if the dealer is wrong THEN the effects on liquidity could be seen (my guess)

Check out Oslers paper "Price Discovery in Currency Markets"
http://people.brandeis.edu/~cosler/p...very_11-07.pdf

I'll take a look at it. I've read it before and the main point I took from it was that Lyons' model of the adverse selection component of the spread was wrong lol.

Sure everyone has their own perceived value and it's pretty much priced into the market, but in order for you to know the market is mispriced, you either have to have your own perception of what the value should be, and if the price isn't there then you can say it's "mispriced" (but how could you have come to the conclusion of what its value should be without some major fundamental analysis... and even that will only get you at most a general value area I think), or else you know it's mispriced because you know the reason why price just moved, and it isn't fundamental or informed (i.e. you have a good idea that a bunch of stops just got hit which pushed price up), so you can relatively safely say the market is mispriced and look to fade it. (I don't subscribe to the notion that TA determines price, imo it's silly to think that chart patterns can determine the exchange rates between various countries, although they certainly can affect the shorter term fluctuations.)

I agree with you t here Eurotrash about TA - these "patterns" are just the results and after effects of real people opening orders in the market. (obviously!) but yes patterns are just the end product. As for me, its funny because most of the trades I enter are right on the formation of these famous patterns, H+S, 123, pin bars double tops whatever. But they are never the reason I entered in the first place. Just an end product - i think this is the majot problem with TA traders where they go looking for patterns and having no clue as to why the pattern formed in the first place, or what actually lead to its formation and so take trades in the wrong places and at the wrong times.

I think this whole orderflow thing is just taking advatage of the system thats in place and "mispricing" is in basic terms just that! An error by the people that set the price. (genius I know lol) but what i mean is does there really have to be an ACTUAL REAL PRICE VALUE for an instrument to be mispriced? Think about it (I cant say for sure but I doubt even if an actual value existed that anyone would know it). The markets just made up of perceptions really

Someone correct me if Im wrong cause I dont know for sure

OK I'm assuming you're not talking about mispricing as in one dealer offering a different price from another, we're talking about everyone offering the same price and that price being "wrong" - mispriced. If there is such a thing as mispricing (incorrect price), then there is such as thing as a correct price. If that is so, then there must be an "ACTUAL REAL PRICE VALUE" (the correct price, probably the sum of all known and expected fundamental information at that point in time), even if it is ever changing. If there wasn't a correct price, then price would never be incorrect (mispriced).

Unless we're talking about arbitrage between multiple instruments, in which case they may be mispriced relative to each other - but I'm sure that's not what we're getting at here.

(BTW if my arguments are crap that's because I've really never thought of this concept before today.)

:edit:

Let's say the markets are efficient, all known and expected fundies priced in from all the various people with their various interpretations and expectations, market moving smoothly along. Then some random uninformed person buys 500 mil and moves the market. The new price after the move would be a case of mispricing because the new price does not reflect any new information. The correct price would be the price before he bought.
I feel I'm missing something really obvious here... or I'm misinterpreting the concept of mispricing.

You're closing in on the reality of the markets, Eurotrash. Informed traders are big traders. It's all a joke really. All we can do is hope that those who push prices around with their orders have done their homework and are truly acting on behalf of good information. If you want to be an informed trader, start a really big hedgefund and tell everyone how smart you are. Then start throwing dealer inventories off by simply trading with them. If they don't adjust their quotes, buy more. If the next dealer doesn't adjust his quotes buy more. You are really smart, because you've told everyone you are really smart. Eventually you'll throw off dealer inventories enough to force them to adjust their quotes. Then maybe your trades and the price adjustment will create a pin bar or some silly 'signal' and more people will buy. Quotes will be adjusted and you are long, dealers are short with with YOUR trades and need to get rid of the inventory. They put your trade volume on the bid at the raised prices and you sell your inventory back at a profit. The handy dandy fool's pin bar turns out not to be a signal at all, oh, dang it.

That's somewhat a silly and exagerated example, but you get the idea. Until you can move the market yourself, pay attention to what the big guys are doing, they control the market.

Think about the new meaning the phrase "buy low sell high" takes on with this new perspective.

This entire thread is, shall we say, BIZARRE !!
As a simple example you are forgetting that
the FOREX market is also made up of multi-
national corporations who care more about
payroll and less about what hedge funds and
are banks are doing.

You can discuss ENDLESSLY a million different
things/circumstances that will cause the markets
to react and you can know every tiny detail about
bucketshops, brokers and banks.

In the end YOU EITHER HAVE A BUY /
SELL SIGNAL or you don't.

Nothing else matters.