[RESOLVED] Bid Ask Difference

[SirEvenhand]

I am working on making my own trading market where traders can trade web site share (kind of like urladex and urlashare but with a twist)

Traders can not deposit any money into their account. (I supply the money to the system to do all trading.)

Traders can build real cash balances through trading shares and withdraw money once a month.

Trading will only be allowed during set hours each day.

Now if a trader is bidding to buy 100 shares of a site and another trader is selling an equal 100 shares of that site the trade will automatically go through, but if a trader is wanting to sell 200 and the buying trader is only wanting 100 shares what would be the best way to handle the trade? Should I process the buyers trade since he is able to complete his trade or should I handle the trade as incomplete until I can complete both sides of the trade?

Any help on this would be greatly appreciated.

[paulnaj]

Is there some sort of standard 'trade etiquette' that you should be following?

If not, maybe you could ask the seller if they are willing to part-sell and if so, what's the minimum part-sell. Similarly for the buyer.

P.

[SirEvenhand]

I guess I forgot to mention one factor. I will be charging each trader a $1.00 fee for the trade. So if the seller is wanting to make a sale calculated on the price and fee, then what happens if the short sale is not profitable to the seller.

[etully]

I think the way it works in the real life stock market is that your broker gets a commission for doing her job which is to handle the matching. So if I want to sell 8763 shares of IBM, it's pretty unlikely that there will be someone wanting to buy 8763 shares so she sells 4000 to one person, 3000 to another person, and 1763 to a third person. (The third person really wanted to buy 2000 but they take what they can get).

Actually, I think there is another factor which is that the broker has a pool of stocks. When I want to sell 8763 shares of IBM and they have a buyer for 8000 shares, they buy the whole amount from me and keep 763 for themselves which they keep around for a week or two until they find a buyer. Running this pool (or buffer) is a little risky for the broker but (a) they might make a few bucks on the stocks in the pool, (b) they might make more $$ off my commission than the amount they risk losing by sitting on 763 shares of IBM for a few weeks.

But back to your question: If I want to sell 8763 shares of www.yahoo.com, I don't care if you sell that to one person, three people, or 8763 people who all wanted one share each. I'm not paying you my $1.00 selling commission based on the number of people you deliver the shares to. (I'm certainly not paying you $8763 in commissions if you deliver my shares to 8763 people!) The buyer is paying their dollar to get X number of shares - they don't care if it comes from one person or six. They just want to pay their dollar and get their shares.

So my suggestion is that you find a way programatically to do your best to enable as many trades as possible to happen as often as possible so that you can pick up a dollar from each seller and a dollar from each buyer as often as possible. More trades is more money for you!

Sometimes you will have one seller and multiple buyers - sometimes you will have multiple sellers dumping shares that all go to one buyer. You might be able to accomplish this by "pooling" shares so that buyers and sellers find it fairly easy to make their transaction happen.

Of course, let's say that www.yahoo.com is selling for $9 and a seller comes along and asks $80 per share for his 1000 shares. You aren't obligated to buy his shares for that price. You'll need some sort of computer logic that says, "his asking price is close enough to the going rate that I'm willing to buy them at that rate and keep some in the pool for awhile because if I can't sell them today, I'll be able to sell them out of the pool tomorrow." Likewise, if someone wants to buy shares for $2 and you have a bunch in the pool, you aren't obligated to sell them if the going rate is $9.

[SirEvenhand]

Thanks etully. You are understanding the basics that I am using to make this program. The traders don't care how many sales have to be completed to make their trades just that they can trade (x) amount of shares and the cost of the trade is the one price.

I think that I have found a useful way to make the 'trade etiquette' fix the problem I have been searching for. (It is know as fill or kill orders.) if a trader is not wanting to
end the day with a remainder of any unsold shares, they can select fill or kill and the system will only execute the trade if all shares are available.

If no one has any better ideas by the end of the day I will mark this post as resolved.

Thanks for the help.