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In reality, is the spot price of a publicly-traded stock determined by a central algorithm as a best guess?

Personal Finance & Money Asked on April 22, 2021

Every resource I’ve read about how a publicly-traded stock’s spot price is determined says that supply and demand is a major component but not the whole pie. I’ve read about naked shorts (which are now illegal among stocks but apparently still exist in practice in other dubious manifestations) and how counterfeit shares can affect spot price. I’ve read about short ladder attacks that can apparently "trick algorithms" into driving a spot price down. And I’ve read other things as well.

That said, when someone sees a publicly-traded stock’s spot price as $1.25, for example, is that number identical across all other brokers in real time? Does that mean then that a central algorithm is computing the spot price as a best guess of what it thinks the market value actually is? And if so, what sorts of things are also considered in this algorithm and how transparent is it? Because nothing I’ve read from authoritative sources says that it’s entirely supply and demand.

2 Answers

Naked shorting is still supply and demand. It's just illegal supply.

For exchange traded stocks in the U.S.:

The National Best Bid and Offer (NBBO) is a Securities Exchange Commission (SEC) regulation requiring brokers to trade at the best available (lowest) ask price and the best available (highest) bid price when buying and selling securities for customers.

The NBBO is calculated and disseminated by Security Information Processors (SIP) as part of the National Market System Plan (NMSP), which is used to process security prices.

That means that current orders on the order book determine what the current price and it is totally based on supply and demand. The only reason that this number will deviate from broker to broker (I have seen it) is that the speed of one broker's quote dissemination is fractionally slower than another.

Correct answer by Bob Baerker on April 22, 2021

is that number identical across all other brokers in real time?

It should be very close, or only deviate for a very short time. otherwise there's be an arbitrage opportunity (buy a stock from one broker and sell it through another) that would bring the prices in line. High-frequency traders actually exist to take advantage of short-lived differences across brokers in this manner.

Does that mean then that a central algorithm is computing the spot price as a best guess of what it thinks the market value actually is?

Not at all - it's still driven by supply and demand, materialized through orders placed in the central exchange (e.g. NYSE)

Answered by D Stanley on April 22, 2021

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