No. of Recommendations: 9
Jim and others might consider a refinement to the refinement: prices are affected only by the small subset of investors who are willing and able to consider a potential trade, and who actually get around to putting in a buy or a sell order. And you might even say that a buy or sell order that is far from the current bid and ask have no effect either. In fact, it is really ONLY the 2 investors who are currently asking for the lowest price or bidding the highest price that are influencing the current quote.
This is true, as far as it goes, for a single trade. No argument.
But I think of it a bit more crowd-like: the ones who are just slightly outside that pair who traded (the ones who are considering, but not quite willing, to trade during that time interval) are the ones who in effect choose which two will get matched up and do that one specific trade, and by extension the price at which they trade. Market depth really does matter in short intervals, as for most stocks there is some sort of steady stream of bids and trades sloshing back and forth. In effect, the current pair will trade at the price that is some sort of time- and volume- and price-weighted average of all the bids very close to the current best bid and ask.
Jim
