Sorry, Zillow's Computer Can’t Buy Your House Right Now
Also CEO pay, the Boredom Markets Hypothesis and Big Short guys being big short.
Deciding how much you should pay for a share of large-cap publicly traded stock is not an entirely solved problem, but it’s pretty close. If someone comes to you and says “hey I have 100 shares of Microsoft Corp. stock for sale, how much will you pay me for it,” a pretty decent answer would be to look at the last price at which Microsoft traded — like a millisecond ago — and subtract, you know, one cent from that price. That will get you a price that is likely to be competitive (the seller might actually sell to you), likely to be profitable (you might be able to sell it for more than you paid), and unlikely to be disastrous (you probably won’t have to sell it for much less than you paid). People who are actually in the business of buying and selling stocks have developed some important refinements to this algorithm; their prices might be informed by recent trades other than the last one and depth-of-order-book information and trading prices of correlated securities and their own inventory and a finer judgment of the appropriate bid/ask spread. And of course there will be situations — the opening of the day’s trading, trading just after some news hits, etc. — that require more complex judgments. But “the last price minus a penny” is often a decent approximation.
The fact that this is pretty easy means that there is a whole industry of people — “market makers” or “dealers” — whose business is to buy and sell stocks from people who want to sell or buy them. If you own 100 shares of Microsoft and you want to sell them to pay for a kitchen renovation, you don’t hunt around until you find someone who just got a bonus and wants to invest it in Microsoft stock, and then agree on a trade. You just hit a button that says “Sell,” and a microsecond later some professional market maker buys your stock from you. And then when the other person gets a bonus she can hit a button that says “Buy” and a professional market maker will sell her the stock. Essentially every trade goes through a dealer.