Secondary Market: Trading, Price Discovery, and Order Matching

Abstract

Price discovery is achieved as orders are submitted to a market and turned into trades. A transaction price is, of course, determined each time a trade is consummated, but price discovery refers to something more fundamental. Price discovery refers to the search for a value that best reflects the broad market’s desire to hold shares of a stock. In economic parlance, price discovery involves the search for an equilibrium value. While price determination occurs on a trade-by-trade basis, price discovery is achieved only as a substantial set of orders is brought together, generally over a succession of trades.