Price Discovery Task

A Price Discovery Task is a discovery task of an item price.

• Example(s):
  • Consumer Product Price Discovery.
  • Financial Asset Price Discovery.
  • …
• Counter-Example(s):
  • a Sell Ordering Task.
• See: Price Setting Task, Market Maker, Item Valuation.

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References

2015

• (Wikipedia, 2015) ⇒ http://en.wikipedia.org/wiki/price_discovery Retrieved:2015-3-9.
  • The price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers.

2014

• http://www.investopedia.com/terms/p/pricediscovery.asp
  • QUOTE: A method of determining the price for a specific commodity or security through basic supply and demand factors related to the market.

    Price discovery is the general process used in determining spot prices. These prices are dependent upon market conditions affecting supply and demand. For example, if the demand for a particular commodity is higher than its supply, the price will typically increase (and vice versa).

2012

• http://en.wikipedia.org/wiki/Price_discovery
  • The price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers.

    Price discovery is different from valuation. Price discovery process involves buyers and sellers arriving at a transaction price for a specific item at a given time. It involves the following:

    • Buyers and seller (number, size, location, and valuation perceptions)
    • Market mechanism (bidding and settlement process, liquidity)
    • Available information (amount, timeliness, significance and reliability) including futures and other related markets
    • Risk management choices.
  • In a dynamic market, the price discovery takes place continuously. The price will sometimes fall below the duration average and sometimes exceed the average as a result of the noise due to uncertainties.

    Usually, price discovery helps find the exact price for a commodity or a share of a company. The price discovery is used in speculative markets which affects traders, manufacturers, exporters, farmers, oil well owners, refineries, governments, consumers, and speculators.

2010

• (Romeu, 2010) ⇒ Rafael Romeu. (2010). “Price Discovery in Markets with Multiple Dealers.” In: IMF Staff Papers, 57(2).
  • ABSTRACT: Dealers learn about asset values as they set prices and absorb informed order flow. These flows cause inventory imbalances. This study models price setting in markets such as foreign exchange, U.S. treasury bonds, European sovereign bonds, and the London Stock Exchange, where market makers have multiple instruments to smooth inventory imbalances and update priors about asset values. Estimating a dealer pricing model with multiple instruments for inventory control and information-gathering yields support for what at times have been elusive inventory and asymmetric information effects. The model presented yields direct measures of the structural-liquidity cost parameters faced by market makers, akin to Kyle's Lambda. For example, the estimates presented suggest that a $10 million incoming purchase pushes price up by roughly one basis point, and dealers expect to immediately lay off one-third of every incoming order. Compared with estimates of price setting in single dealer markets, price shading is found to have a smaller role in inventory management and information effects are shown to be stronger. Hence, estimating traditional microstructure models (based on only one market maker per asset) on data from asset markets where market makers have multiple instruments misses information from sources other than incoming order flows, and overemphasizes price shading in managing inventories.

2005

• (Banerjee & Chakravarty, 2005) ⇒ Suman Banerjee, and Amiya Chakravarty. (2005). “Price Setting and Price Discovery Strategies with a Mix of Frequent and Infrequent Internet Users." Social Science Research Network. doi:10.2139/ssrn.650706.
  • ABSTRACT: In this paper we develop an analytical model that characterizes the structure of price dispersion observed in electronic markets. Findings of our model are consistent with empirical evidence in these e-markets. We show that when different types of buyers' have different search costs, firms follow noncompetitive pricing strategies. Also, our model shows that price dispersion may actually increase if search costs falls, challenging the common belief that price dispersion decreases as search costs fall. We derive multiple price dispersion equilibria, with differing levels of welfare implications. These results are generated without the need for assumption of asymmetric information, and heterogeneity amongst buyers and/or firms. Our results show that the process of search alone may generate price dispersion, and highlight the importance of processes of search not only on prices, but also on the efficiency of e-markets.

2001

• (de Jong, 2001) ⇒ Frank de Jong. (2001). “Measures of Contributions to Price Discovery: A comparison.” In: Discussion paper // Tinbergen Institute
  • ABSTRACT: This note clarifies the relation between two competing definitions of the contribution to price discovery in market microstructure models: (i) the information share and (ii) the common factor component weight. It is demonstrated that the two measures are closely related, but that only the information share takes into account the variability of the innovations in each market's price.

1998

• (Ackert & Church, 1998) ⇒ Lucy F. Ackert, and Bryan K. Church. (1998). “Competitiveness and Price Setting in Dealer Markets.” In: Economic Review
  • ABSTRACT: The National Association of Securities Dealers Automated Quotations (NASDAQ) System is an Electronic Market for OVER-THE-COUNTER (OTC) Stocks. It is the Second-largest Securities Market in the United States. Allegations that dealers collude to widen bid-ask spreads have led to sweeping changes in the rules governing trading in the NASDAQ Stock Market.

    Bid and ask quotes are prices at which dealers or market makers are willing to transact. A market maker is an individual or firm that risks its own capital to provide investors with immediacy of supply and demand. The bid-ask spread represents the cost to investors of transacting with the market maker. Investors prefer a narrow spread because it reduces trading costs and improves liquidity (Amihud and Mendelson 1986). Bid-ask spreads, like other transaction costs, significantly affect the efficiency of capital markets (Bhushan 1994; Kim and Verrechia 1994). In an efficient market, prices quickly reflect new information so that the information cannot be used to derive abnormal trading profit. Stock markets are thought to be more efficient when spreads are narrow because information is disseminated more quickly. Yet, at the same time, dealers must receive adequate compensation for making a market in a security, or the market's liquidity is threatened.

    Regulators and investors have asserted that Nasdaq dealers conspire to widen bid-ask spreads in order to in-crease their profit at investors' expense. Academics have amassed a substantial body of evidence relating to the Nasdaq scandal. Yet there is no consensus concerning whether dealers collude to fix prices and widen bid-ask spreads.(1) Observed spreads may result from institutional features particular to the Nasdaq market rather than collusion among market makers.

    This article explores the Nasdaq pricing controversy in light of economic theory and evidence of alleged collusion, including evidence contained in U.S. Department of Justice and Securities and Exchange Commission reports (1996). The following section examines the important role that securities markets play in promoting a stable economy. Then the discussion reviews specifies of the two organizational structures commonly adopted--auction and dealer markets. These initial sections provide a foundation for understanding the significance of the Nasdaq controversy. Subsequently the article considers the sources and economic consequences of divergence in spreads. Finally, it elaborates on what constitutes collusive behavior and summarizes the ease against Nasdaq.

1995

• (Hasbrouck, 1995) ⇒ Joel Hasbrouk. (1995). “One Security, Many Markets: Determining the Contributions to Price Discovery.” In: The Journal of Finance, L(4).
  • ABSTRACT: When homogeneous or closely-linked securities trade in multiple markets, it is often of interest to determine where price discovery (the incorporation of new information) occurs. This article suggests an econometric approach based on an implicit unobservable efficient price common to all markets. The information share associated with a particular market is defined as the proportional contribution of that market's innovations to the innovation in the common efficient price. Applied to quotes for the thirty Dow stocks, the technique suggests that the preponderance of the price discovery takes place at the New York Stock Exchange (NYSE) (a median 92.7 percent information share).

1992

• (Leach & Madhavan, 1992) ⇒ J. Chris Leach, and Ananth N. Madhavan. (1992). “[Intertemporal price discovery by market makers: Active versus passive learning].” In: Journal of Financial Intermediation, 2(2). doi:10.1016/1042-9573(92)90008-2
  • ABSTRACT: This paper demonstrates that market makers have the ability and incentive to facilitate price discovery in securities markets. Market makers can expedite the process of intertemporal price formation by setting prices to induce statistically more informative order flow. Such actions constitute an investment in the production of information. Under certain conditions, market makers can recoup the cost of this investment by making better pricing decisions in the future with more precise information. These conditions are analyzed in a general model and several examples that illustrate the complex nature of price discovery are presented.

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