Price recognition

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The process of price recognition is a term used in finance or the financial system , which describes how to market new information is processed in the form of prizes. The price of an asset, such as a share or a commodity , is primarily determined by the interaction of buyers and sellers in the market. If individual market participants have new information about the asset, these traders will influence its price by buying or selling the asset. In the process of price detection, derivatives , especially futures and options that are traded in standardized form on futures exchanges , play a special role, as these can usually be traded faster and cheaper than the underlying assets. As a result, futures markets can usually process new information more quickly than cash markets .

Influencing factors

The ability of a market to “recognize” new prices is influenced by various factors. These include:

  • The number of buyers
  • The number of sellers
  • The volume traded on the market
  • Trading hours
  • Transaction costs (fees, taxes, transportation and storage costs, etc.)
  • Contract size and specification (for derivatives).

The greater the number of buyers and sellers in a market, or the greater the volume traded on the market, the faster this market can process new information, since market participants can find trading partners more easily. The trading hours of a market play a role in that a market can only process information as long as it is open and actively traded on it. Transaction costs include all those costs that the buyer of an asset has to bear in addition to its actual price in order to acquire this asset. They include u. a. Broker fees, taxes and duties, as well as costs for storage and transport, which v. a. play a significant role in the purchase of physical goods such as raw materials.

In the case of standardized derivatives, the structure of the contracts also plays a decisive role. If the contract size is relatively small, even traders with little capital can quickly buy many contracts. The smaller the tick size of a contract, the finer price changes are possible.

Role of futures exchanges

Recognizing new prices is one of the main tasks of futures exchanges. Instead of the assets themselves, standardized derivatives are traded on these, the price of which depends on that of the respective asset. This enables market participants to react particularly quickly to supply or demand shocks since, unlike cash markets, there are no transaction costs for storage or transport. Another aspect of derivatives is speculative transactions, as they can be carried out without the trader having to own the underlying asset or borrow it first. As a result, futures markets can benefit from a larger number of traders and thus from an improved price recognition function compared to cash markets.

Individual evidence

  1. ↑ Kenneth D. Garbade , William L. Silber: Price Movements and Price Discovery in Futures and Cash Markets . In: The Review of Economics and Statistics . tape 65 , no. 2 , 1983, p. 289-297 , doi : 10.2307 / 1924495 , JSTOR : 1924495 .
  2. ↑ Bart Frijns, Aaron Gilbert, Alireza Tourani-Rad: The determinants of price discovery: Evidence from US-Canadian cross-listed shares . In: Journal of Banking & Finance . tape 59 , October 2015, ISSN  0378-4266 , p. 457–468 , doi : 10.1016 / j.jbankfin.2015.07.011 (English, elsevier.com [accessed on September 6, 2018]).
  3. ↑ Jian Yang, David A. Bessler, David J. Leatham: Asset storability and price discovery in commodity futures markets: A new look . In: Journal of Futures Markets . tape 21 , no. 3 , March 1, 2001, ISSN  1096-9934 , doi : 10.1002 / 1096-9934 (200103) 21: 3% 3C279 :: aid-fut5% 3E3.0.co; 2-l ( wiley.com [accessed 6 . September 2018]).