How do market makers determine a stocks price?

Question

I purchased shares of a low-volume stock. I puchased a thousand shares at the ask price. It was picked up and the volume increased by exactly 1000 but the price was not affected. Can someone explain how this works?

Thanks.

Answer 1

Market makers determine price based upon what they want to pay for a stock given what they believe the risk to their inventory is. In low volume stocks, they cannot use the market as a direct guide to price. If they were holding a very large inventory already, they may not want to raise the price as that would discourage further purchases by others.

For example, lets pretend that the maker owns 10,000 shares of ABC stock and only wants to hold 1000 shares with a bid and ask of 9.50 and 10. Someone buys 1000 shares and there are no competing limit orders. Let us also assume that the shares were accumulated by the dealer at 9.70. So, the broker will make 270 if able to reduce inventory to 1000. The dealer also has to be willing to take on more inventory and will do so if they can lower their cost basis they already have.

You come along and buy 1000 shares. If they increase the price, it is less likely someone else will come along. Low volume stocks do not have momentum effects. Price and demand are inversely related. They just want to make their $30 within some planned amount of time. Likewise, they may only be willing to buy 100 shares at 9.50. If you tried dumping the entire 1000 shares it wouldn't be a surprise to find the stock trading at 8.50 with you receiving the 8.50 on the remaining 900 shares.

In large volume stocks the same mechanics happen, but they happen in seconds instead of months.

What likely happened was that the dealer is or was sitting on a lot of shares and won't permit the price to move until they exit their inventory risk or there are volume changes. When you buy a low volume stock, you are marrying it. I have seen positions that have taken 4 months to close in low volume stocks and that is trading every day a little at a time. You must always presume you will never be allowed to sell a low volume stock. There are certainly stocks out there that trade only once a year. Depending on average volume, you may well be the only trade this week, this month or on the pink sheets, this year.

Answer 2

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Answer 3

supply and demand. The price won't increase, until all the available shares have been sold, AND people still want to buy the stock. There's no "market" unless the shares are limited.

Answer 4

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