Sunday, November 20, 2011

interpret a buy trade -- non-trivial

When someone BUYS a block BUY, she may want price to RISE, so that she can sell sooner. In this very realistic scenario, if she sees part of her big order filled at 10% below the original "arrival price", she would be devastated. As a margin trader, she may collapse. Her broker would force a big sell at the market price, sinking the entire market further.

For a high-frequency buyer, rise is better AFTER her buy executes. Fall is unfortunate, but now he could buy more.

Rule -- Most buyers (big or small, short or long term) wish that their buy was at some kind of turning point.

When someone BUYS a block BUY, she may want price to NOT RISE, so as to minimize impact. She may want to slowly and discreetly execute a big trade.

When someone buys, price generally tend to rise -- think of the order book. However, she may want price to FALL, so she can buy more at a better price. This would be the scenario of a agency trader executing a large buy order at the "arrival price". Client might be Warren Buffett, who wants to buy and hold 900m shares. In this case buyer wants price to FALL during order execution.

Rule -- In conclusion, a buyer may want a price drop or price rise.

Rule -- a buyer may be either bullish or bearish.

A bear may have sold first, and is now buying back.


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