All language subtitles for 002 Orders Driving Prices (Level1 - Level2 - Time and Sales)_en

Welcome back. In this module we're going to be covering: What makes prices move? A lot of people think news-

or events make prices move but the actual thing that drives prices is orders that people send.

And we're going to see that the through an example in this module.

So make sure you look at the notes that are accompanying in this module.

We're going to go through an example and let's say this let's say you've started your own company and we

can use the same example that we've used before the drone company.

So your company has a ticker.

That's DRN, now the listing exchange which we've talked about before might be

New York, so your stock is trading on New York Stock Exchange. The shares outstanding, now shares outstanding

is something we haven't talked about yet. Shares outstanding is the amount of shares that your company has.

OK.

Now let's say your company had a hundred thousand shares outstanding, again we're referring to shares outstanding,

It's the amount of shares that were issued by the company. So all shares outstanding,

You have a hundred thousand shares. Now there's something else that we haven't covered that's called

the float.

The float is actually the amount of shares that are currently trading on the market.

So it's not because a company has 100,000 shares outstanding that it has a 100,000

shares of floats because a company might be holding some of its shares for itself or some of its shares

might be locked up somewhere that they're not trading.

So the shares that trade on the market right now is what we call the float.

For example let's say that your company has 75,000 shares of float meaning there is

75,000 shares that are trading on the market right now.

If you want to buy all the shares on the market you can buy 75000 shares of that stock.

So there's 25,000 shares that are locked up somewhere either by the company either by

some private investors somewhere that are not available on the market at this time.

So if you look at the notes, and we're going to give an example that's very simplistic let's

say the whole world

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The whole world is composed of 10 people.

Now obviously this isn't the case in real life.

There's millions and millions and billions of people but a lot of people who trade the market.

But let's say there's only 10 people in the whole planet that have access to trading and trade right

now.

And these participants, it's on your notes,

you have participant 1 who has 40,000 shares in this company.

Participant 2 has 10,000 shares and make sure you're following along with the notes and filling it up

as we're doing it here.

Participant 3 has 2000 shares. Participant 4 has zero shares.

So not everybody needs to own stock in that company.

Right.

So people might not want any of that.

Participant 5 has 2,000 shares, 6 has 5,000 shares.

7 has a 1,000 shares,

8 has zero shares again.

Participant 9 has 10,000 shares and participant 10 has 5,000 shares.

Now that being said they own shares of the company but they haven't traded that stock yet.

If go one the market to see what's the price of that stock

there's no price.

OK so now this situation represents the whole world.

Now again I only named 10 participants.

But let's imagine that that's the whole planet right now.

So these 10 participants own shares in your company.

OK.

They haven't traded the stock yet.

So we're going to assume that your company IPO'd which we covered earlier and they got shares in

the primary market for your stock.

But now they haven't traded it yet. How do they trade those stocks?

If they want to buy more shares or want to sell some of their shares, they got to send an order to the

market.

Right.

So this is exactly how it's gong to happen.

So let's put it on here.

You know see in the example Participant 1 wants to buy 3,000 shares at a limit price of $41.

So how would he do that.

He'd have to send an order right?

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And on his order it'll have to say the price, the limit, and everything we've covered in the previous

module.

So $41 dollars is the price he would like to buy at, 3,000 shares.

And that's it.

Obviously you're going to have to put on your order

that it's a buy order you're going to have to put the ticker on your order.

And that it's a limit order.

Now you give this order here to your broker.

OK.

So again previously you can mail it to him you can call them on the phone tell him even now some people

call to buy something but I can just put it on your computer.

It's going to go through your internet.

Go through your broker and he sends it to the exchange.

Now when it's right to the exchange, the exchange has a computer very similar to an Excel sheet and that

computer is actually a matching system.

a matching algorithms that matches buyers and sellers together to get executions.

Now once that order gets there it goes on their system.

They have two long columns.

A column on the left and a column on the right. In the column on the left they put all the buyers.

The column on the right they put all the sellers.

So since you're a buyer they're going to go on this column and put your order in here.

So you want to buy at $41 3,000 shares and they'll just leave it and they'll wait until somebody else

comes, matches your price to give you an execution.

Now participant number 2 here wants to buy 5,000 shares.

Let's fill this one up at $39.

Again,

his order is going to come through,

goes to the exchange,

Now where is his order going to go on the book on the matching system of the exchange?

Above it or below it? It will actually go below it because the way the set it up is there is a price priority for

buyers.

So the higher you are willing to buy a stock the better your priority is, So you're going to get an execution before him because

you're willing to pay more. And for the sellers,

Well the lower you're willing to sell the higher the priority you're gonna have.

So their algorithm has a price priority, then a time priority for it.

So the person who has the better price is on top.

But if two people are at the same price then the person who came first has priority.

Again we have participant number 2 wants to sell 5,000 shares at $55.

Now you might ask yourself "Well participant 2 already sent already an order buy." Well he can send orders to buy

and sell.

Because remember he has 10,000 shares.

So he wants to buy some more if it goes to $39 but he might want to sell if it goes higher.

So participant number 2 wants to sell 5,000 shares at $55.

So let's put it here.

So $55.

$55.

He wants to sell 5,000 shares.

So when the exchange gets this order it will actually go on the seller's side.

Now this is starting to look like something familiar maybe for some of you.

This is actually what we call the level 2 or the book.

It's actually a large book.

We call it level 2 or sometimes we call it the book and what it represents

Is it represents

every single buyer and every single seller that's out of the market.

OK.

And from the book we actually create something that we call the level 1 which most of you might

be familiar with.

Level 1

is actually the best price the best bid and the best offer that's available on the market.

So the best price that somebody is willing to buy a stock at and the best price that somebody is willing

to sell a stock at. So it's going to be this price and this price.

So this $41

3,000 shares and $55 and 5,000 shares is what we call the level 1

So whenever somebody calls their broke rand tells him "Him hey what's the level 1 or give me a quote

on that."

They're asking for this:If I want to sell it right away at what price can I sell at.

Well $41 because there's a buyer here and if I want to buy right away what price can I buy at?

Well you can buy $55 because it there's a seller at $55.

So that's the bid and ask.

This is the bid,

this is the ask, and this is the level 1 which is created from the level 2 from the book and the book

updates

every time somebody sends an order on it. And the level 1 is going to update every time

the best bid or the best offer changes.

Right.

So again seller 2 wants to send another

sell order, this time at $59

for another 5,000 shares.

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So we'll just grab this here,

right here.

OK.

So this is where it goes because he wants to sell at $59 which is a worse price than $55. $55 is going

to have priority.

So this one goes down in the book.

So we have two buyers here, one at $41, one at $39.

And two sellers, one at $55, and one at $59.

Now there has been no trading yet.

So if you go online to look at a chart or if you go online to look at the price there's

only been an ask but there's no execution there's no last price.

where that stock has traded at because there's no two orders that have matched together

yet.

OK.

And

So number 3, participant number 3 wants to sell 2,000 shares at $52.

So $52, 2,000 shares. Where would his price go?

Right.

So it would go on the sell side,

But where would it go? Would it go

here, would it go between these? or would it go at the bottom?

$52 will go on top because if you're a buyer you'd prefer buying from the guy who has $52, not from

these guys.

So he's going to have priority.

So in the book these prices are going to

Scoop one down and this order is going to get on top of them.

So this happens on the computer of the exchange.

Now what is participant number four want to do? Doesn't want to do anything and that's ok.

Not everybody in the world is going to send orders.

Participant number 5. What does he want to do?

He want to buy a thousand shares at $50 dollars, so $50

want to buy a thousand shares.

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OK.

So where is this one going to go?

Let's see $50 bucks. $50

That's a worse price than.... oop!

So if you're a seller who would you want to sell it to? $39, $41,

or $50?

You're going to sell it to the guy who is going to buy it at $50 right?

So $50 is going on top.

So these ones are going to go down and you'll see here and actually i put this one when

this changed,

You see $55 changed and $52 came on top.

Well something had to change as well.

The level 1 should have changed because if you want to buy it you don't have to buy it at $55 anymore

You can buy at $52

So the level 1 updates at this point,

So if you're looking at your computer screen you're going to see that the level 1 updated.

And now you can buy at $52 instead of at$ 55.

Now this buyer comes in, he goes on top.

Again, the bid changed.

So what's going to happen?

The level one needs to update again. So this changes.

In here the bid is going to be $50 and its 1,000 shares.

So the level one updates, every time this updates and the book updates, when you're looking at traders

and their screen is constantly updating updating updating

That's what you're looking at.

You're looking at orders coming in and these orders affecting the book or affecting the quotation for

that stock.

Participant number 6 wants to buy 2,000 shares at $48.

So $48,

wants to do 2,000 shares.

Now where would this go? Buyer comes in, it goes right in between here right?

So it's worse than $50 but better price than $41.

This one is going down, this one goes down, and this one goes in between.

Again, no trades yet.

Participant number 7 wants to sell a thousand shares at $51.

Thousand shares

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Where would this one go?

Again as a seller it goes on this side when it reaches the exchange up and actually it would go above this one because

it's actually a better price than 452.

So this one is going to go down and then this one take its place.

Now what happens.

Again the level 1 is going to change.

It becomes $51, 1000 shares.

Very simple. Again no trades happened so far.

Now comes in participant number 8.

who wants to do 5,000 shares at $46 dollars and he wants to buy 5,000 shares at

$46.

5,000 shares

Where is that going to go? It will go right below $48.

It comes to the exchange, goes on a bid side drops down and goes right here.

And that's it. Your book updated, does the level 1 update?

No because these prices didn't update it, the best book the best ask they didnt update

So that doesn't update. Now participant 9 comes in and says "Hey I want to sell 5,000 shares at

the market"

He wants to sell.

Right.

He doesn't want to put up a price,

he just wants to sell.

So he sends his order in and on his order it says that there's no price.

It says 5,000.

It says market order. MKT

And says 5000 on it.

So his broker gets it,sends it to the exchange and again, what does he want to do?

He wants to sell. Since he's not putting his order in.

He's actually sending it to the buyers side because he wants to sell.

So we want to execute with these guys.

He wants to sell them.

They want to buy.

He wants to sell his order gets there and sees "oh there's somebody who wants to buy a thousand shares

at $50."

I'm going to sell this to him.

So let's take him off.

I'm going to sell a thousand shares to this guy and then as soon as that happens

we actually go on another item that's called the time & sales.

And this is something else so we have the level 2, the level 1 but we also have the time

and sales. Time of sales is something that the exchange has to report on at every execution that happens and

on it they're going to put the name of the stock that they're trading the time that the trade happened at, the quantity

and the price that it happened at.

So right now there was a thousand shares traded at $50.

So they're going to put the time let's say 1:00pm, they're going to say $50 and then they'll put a thousand

shares.

So that just happened.

Now for this order he wants to sell 5,000.

So there's still 4,000 shares left. There's 4,000 shares missing.

So his order keeps going down the line.

Next person in line is a buyer who wants to buy at $48.

He wants to buy $48, 2000 shares.

So he gives him 2,000 shares as well.

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And in the time of sales it has to update again. So its still 1pm

This happened instantaneous, within nano seconds.

So what price was it 48$. 48$ 2,000 shares . That's done, the order still needs another 2,000 shares to be completely

filled.

So it keeps going down the line.

Oh here's a buyer.

This buyer wants to buy 5,000 shares but at $46.

OK.

Well I only want to get 2,000 more so I'm going to sell him the last 2,000 that I want and he's still going

to be wanting 3,000 more.

So basically I completely filled my order.

And again it's going to come up here 1:00 p.m. $46.

2000 shares that were executed. That seller, so participant

Number 9 is completely done.

He got all his order. This participant who wanted to buy 5,000 shares at $46,

Well he got a partial fill, so he got part of the fill that he wanted to get.

And his order is still open to try and get the rest so he still wants to buy 3,000 shares

Now remark what happened,

what happened is actually that because of the seller we finally got an execution.

Finally suddenly somebody traded and this came out on the time of sales.

Now if you actually go online and check and let's say for this stock right now what price is this stock

trading at?

You'll see that it's trading at $46 because this is the last price that the stock has executed on.

So actually in the level one there's another line for price and the price is actually the last price that

the stock traded at.

So in this case $46, so $46 goes on here.

So if you'll remark, the level 1 is actually an abbreviated quotation system for both the level 2 and the

time of sales because it gets the best book, and again the level 1 is going update again because now what's

the bid? It's $46.

So it's not $50 anymore.

So this updates, so this becomes $46

3,000 shares. So you'll remark that the level 1 is an abbreviation for the book.

So it gives you the best bid and the best ask and puts them on here.

And for the time of sales, so it gives you the last price and puts it on.

So by looking at the level one you can just get a general idea of the market what's the bid, what's the

what's the ask,

the quantity that's been on the bid or the ask and the last price it's been traded at.But if you want to get a bigger picture

of what's been going on.

Who are the buyers? Who are the sellers that are available on the market right now?

Well you need to look at the level 2.

OK.

And that's available for a lot of brokers which I'm going to name in other modules.

And you also need to look at the time of sales because you want to see well how has the stock been trading

in the previous minutes hours or day, you want to look at what is the execution

that's going on.

Obviously we use the time of sales for a short term trading because we want to look at the order flow.

How are people trading right now is it going down, up...

But you would like to have these two tools to give you more information.

So let's continue with the example.

Now the book has changed.

This goes up a bit.

And this is new state for this stock.

These are the buyers.

These are the sellers.

Now participant number 10 actually wants to buy.

5,000 shares at $53.

So let's put it up here...

$53

5,000 shares...

So he sends his order to the broker.

His order gets the broker, now this is a limit order.

But now it doesn't go to the buyers side because it's at $53. Since it's at $53 it can sell right away.

It can execute with the seller right away.

This person is going to buy at

$53

while there's somebody who's willing to sell at $51.

So I can buy from him right away.

I don't need to go here and wait.

I don't need to wait in line.

So it actually goes to the seller side and says:

OK

Well hey there's somebody who's willing to sell at $51

I'm going to buy from him.

So this guy is executed.

Now what happens

It's written on the time of

sales, again let's say 2:00 pm now time passed, $51 dollars is the last trade.

And then 1,000 shares.

Now the order still wants another 4,000 shares.

You only got a thousand out of this guy.

So it keeps going down.

Oh $52.

I'm willing to buy at $53.

So I accept that price.

So this guy gets executed.

OK.

Here its still 2:00 pm at $53.

And 2,000 shares were executed.

Now this guy still wants 2,000 shares.

He wants 2,000 shares, now he goes here,

but the next seller is at $55.

So he can't execute with him because he's only willing to buy at $53.

So he can't get executed with him.

So his order is going to come back here on the buyers side

and it's going to remain open for another 2,000 shares.

So he got the partial fill, he got 3,000 shares out of the 5,000 that he wanted.

The remaining 2,000 shares are going to stay open on the bid side on the book hoping that a seller comes

in and gets the rest of the execution.

So it stays here and this becomes the new state of the book.

Now, level one has to update again.

The bid now is $53.

The ask became

$55.

The quantity on the bid is 2,000.

And the quantity on the ask is 5,000.

And the last price is now $53.

So price went up.

It was $46 and now the price is $53. So if you think about it what made this price change?

Why did the price go up right now?

It was $46 and now it's $53.

Is it because a news came out?

Is it because this is a good company or a bad company?

What does it really because of? It's because a buyer sent an order to buy.

Somebody said in order to buy.

Now we can argue that somebody would send an order buy because it is a good company or because there was

good news.

But sometimes people buy and sell for different reasons.

So at the end of the day its basic supply and demand. Supply and demand is shown through the order book on the

exchange that you can have access to very easily at level 2 see all the buyers see all the sellers and

the price is going to fluctuate based on solely the orders that people send. Now the orders can be affected by different

ways that you can try to predict why people are going to buy or sell but that's why prices are going to move.

So when people look at the price movement they got to understand it's coming from these orders matching

with one another on the execution system or the matching system at the exchange.

So again this is one of the reasons a lot of people get confused when a company has good news

and the stock plummets and they ask themselves "well why is the stock going down?"

Well because maybe somebody said in order to sell a big order and there wasn't enough buyers. So at the end

it is supply and demand.

So a few things I want to cover or terminologies basically is first the bid.

So we talked about that several times.

The bid is going to be the best price that you can buy at.

The ask is going to be the best price you can sell at

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So that's the bid, that's the ask. The spread is going to be the difference between the bid and the ask, that's the spread .

So the difference between the best person who wants to buy and the person wants to sell. Now, why is the spread

of something important?

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Imagine this: There's a stock

and spread or let's say the bid here is $50 and the ask is $52, well if you want to buy the stock

right now, where can you buy it at?

At $52. Now if you buy it at $52 and you completely change your mind and you want to sell right away

where are you going to sell that ask?

At $50

So you basically lost $2 right away.

Even though the stock hasn't moved.

So you actually, what did you lose? And $2 out of a $50 stock

Now that's 4% which is huge.

There's actually not a lot of stocks that have such a big spread.

But for example purposes, you're going to lose $2 right away even though the stock hasn't moved.

So you lose the spread.

So when you have something that has a big spread like this one you got to watch out by not sending

market orders too often because if you send the market order and you're buying at whatever price is available

and then you change your mind and you send another order to sell, well you just lost this right away.

But if you send a limit order and try to buy on this side you can save a huge percentage return.

So you got to watch out for the stock you're trading, does it have a big spread or a small spread?

If it has a small spread like a lot of companies,

If you're looking at Facebook or other of these big companies they have 1 cent spread.

So if you buy and then you decide to sell right away you only lost a cent. But some more smaller companies

or liquid companies they're going to have way bigger spreads.

And there's a lot of stuff that have a dollar and a dollar something spreads.

So you've got to watch out for that.

Now level 1 we've covered it.

There's also the NBBO which is the National Best Bid and Offer. The NBBO is basically the best bid available

and the best offer available.

For now let's assume that NBBO is the exact same thing as the level 1 and in the microstructure course

I'm going to cover more about bids and asks and ECMSs and we'll see what the difference is between

NBBO and level 1 but for now it's basically the same thing.

The best price to buy at and best price to sell at.

Time of sales we saw and level 2

we actually saw. And this is really going to conclude the level 2, level 1, and the time of sales.

These are things that you really need to grasp.

So rewatch this video and that's going to conclude this module and i'll see you in the next one.