Saturday 31 January 2015

Why are buys showing as sells?/There are more buys and than sells and the share price is falling!

One question that is regularly thrown around on bulletin boards, for the stocks and shares is "Why is my buy showing as a sell?" or "Why is my sell showing as a buy?".


The simple answer to this is that buys are showing as sells and vice versa, because the algorithm used to determine these trades is outdated and decidedly more useless than it would have been thirty years or more ago:


Effectively, a trade is given a "Buy" or "Sell" status depending upon which side of the mid point price of the Bid/Ask spread the trade lands on.

e.g.

Bid= 2p
Mid Point= 3p
Ask= 4p


  • My trade is filled at a price of 3.1p and is therefore shown as a "Buy" by the system.



Now, errors occur because the actual Bid/Ask spreads at market prices aren't necessarily the same as those that are "officially" listed and used by the algorithm.

I would add, that as more firms are making markets and as brokerages become more price competitive, we've seen a gradual tightening of spreads over the past thirty years, which is the cause of this problem.

When market spreads are nice and wide, this system does actually work accurately, with a smaller level of error.



Linked to this is the phenomenon of this system showing a stock as having more "Buy" trades than "Sell" trades and still falling in price:


In the case of market orders, this happens because because smaller trades (often the case in stocks with small market capitalisations - you can't get the liquidity for large trades meaning only small players exist in the market) tend not to cause large swings in the market Bid/Ask prices, but smaller moves instead.


e.g.

Bid= 2p
Mid Point= 3p
Ask= 4p


  • My market "Sell" trade goes through at 2.75p (it is below the Mid Point of 3p and therefore shows as a "Sell").
  • The system then registers the Ask Price ticking down to 3p.
Bid= 2p
Mid Point= 2.5p
Ask= 3p

  • My next market "Sell" trade goes through at 2.70p (this is now above the Mid Point of 2.5p and therefore shows as a "Buy" even though in reality it was a sell).

This all works in reverse too, making "Buy" trades look like "Sell" trades.

Generally speaking (certainly not always), if a stock is going down, it's going to be because the market is selling more of it than they are buying. Now, this isn't always the case and sometimes with stocks traded by SEAQ you may see market maker tactics used to fill orders that aren't visible on the order book - tree shaking.

Finally, there's a certain irony in that for the more liquid stocks in the market, the ratio of buys to sells can often be reversed to give an accurate impression of the "real" buys vs sells.


All the best,

The Masked Stock Trader


2 comments:

  1. I don't understand this.

    All trades have a buyer and seller don't they? Or do the trading platforms sometimes buy and hold stocks for short periods while they match buys and sells and take a margin?

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