Price Discovery

We've all been working very hard this year and are having a few days off in New York City. Candace did a great job on the seminar in Chicago and I wanted to buy her a present to thank her. It's also my wedding anniversay soon, so Mrs. EL let it be known that a new watch would be especially welcomed. So I headed for 47th Street, THE best place in the world to buy jewellery. The selection is enormous.


The only problem is that prices are not marked on anything. You have the feeling that they make it up as they look at you, charging whatever they think the market will bear. So what does a trader do? Price discovery.


I had two items to buy, earings for Candace and a watch for Mrs. EL, and I had no idea of price. My first stop was Tiffanys to find out what the top retail price was. Armed with that information, I decided to start walking down one side of 47th Street and into shops that sold what I wanted to buy, asking for offers. When I received an offer I placed a bid. As you can imagine, the spread was pretty wide. The offers were all well below Tiffanys, as they didn't give you that magic blue box, but I still didn't know where to trade.


As I went from shop to shop, I let the next shopkeeper know what my previous best offer had been. I then slightly increased my bid. Bit by bit the spread narrowed and I began to see what the real spread should be.


As soon as I had this information I saw what fair value should be. Then it was easy, I just placed my bid a few ticks below fair value so I could be a responsive buyer below value and went to a couple of more shops until someone found my bid attractive enough to hit it.


All markets are the same. The job of any trader is to see what fair value is so we can buy below and sell above. The frequency and profit range we look for determines whether we are scalpers, daytraders, swingtraders or others. The principals are the same.


I've already put a smile on Candace's face and can hardly wait to get home to Mrs. EL.