Bargaining, from Jim Sogi

May 31, 2009 |

 In the bargaining process one side has the advantage. At some point that advantage switches to the other side, often, but not always, on consummation of the deal. Take a simple market purchase in which bargaining for price is involved. The customer in most sales has the advantage at the beginning since he has the money and the seller needs to sell a product with limited shelf life along with a number of other sellers of similar products. The buyer can negotiate a lower price during the typical three rounds of back and forth. The original offer or bid will set a range that slowly narrows until a deal is reached. The buyer has an advantage of being able to set the range, the initial offer, and he has the money. Once the money changes hands the seller instantly has the advantage, as the goods may not have been what they appeared. In money changing, sleights of hand can often make a deal less than it seemed. In legal matters, at times the first offer has the disadvantage. Now in a real estate market, buyers have the advantage.

In looking at the electronic markets, it is clear that one side has an advantage at times. The timing of this is important. In a dropping market, (define that as you may), bids clearly have the advantage. They have the money, they can submit lower bids. Their advantage lasts until the bottom tick or until the buy fills. The buyer then is at a short term disadvantage until the bottom tick at which point advantage goes to buyer holding in a rising market. At some point after the market turns, the buyers want in, and start competing with each other and raising bids. The buyer holding in as rising market has the best advantage to a point, i.e top tick. The seller, holding wanted goods, has the advantage and can keep raising the offers. As soon as the seller has sold his goods his advantage ends, unless he got top tick. If the seller waits too long and the bid disappears, his advantage disappears as well. The short seller has even less advantage since he owes his creditor as well.

Jeff Watson writes:

In the old days of open outcry, one could easily manipulate the bids and offers by goosing the market. If a buy order came into the market, (and one could detect whether it was a buy or sell order by looking at the movement of the broker's eyes) one could start bidding up a quarter in front of the broker, and perhaps get him to raise his bid where you could in turn sell it to him. One could do the same thing on the sell side. Although this was an effective method for extracting a little extra cash out of the market, it was fraught with danger, since you could easily get speared and end up being long or short a few contracts that you didn't want. Getting speared happened every day and was just the cost of doing business.

Newton Linchen replies:

I was reading the history of the Bovespa (brazilian main stock exchange), and I read that there was a guy who used to hit the market with a big buy or sell order and then hide in the toilet in order to not get filled! (He used to "mess up" this way until he was caught). Your description of reading the eyes of the broker in order to know whether it was a buy or sell order reminds me the tales of the Samurais, where they stood one in front of the other reading each other's breath. The strike always used to come when the opponent was finishing his exhale — the moment he was weaker.





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