Price discovery

In economics and finance, the price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers. Price discovery is different from valuation. Price discovery process involves buyers and sellers arriving at a transaction price for a specific item at a given time. It involves the following: Buyers and seller (number, size, location, and valuation perceptions) Market mechanism (bidding and settlement processes, liquidity) Available information (amount, timeliness, significance and reliability) including futures and other related markets Risk management choices. "Market" is a broad term that covers buyers, sellers and even sentiment. A single market will have one or more execution venues, which describes where trades are executed. This could be in the street for a street market, or increasingly it could be an electronic or "virtual" venue. Examples of virtual execution venues include NASDAQ, The London Metal Exchange, NYSE, London Stock Exchanges. After the 2001 Enron scandal, the Sarbanes–Oxley Act tightened accounting rules on the "mark to market" method. Now, only recently discovered prices may be used, to stop companies from overvaluing their assets. Each night (or reporting period), they have to take a recently discovered market price, obtained from two or more market observers. Recent changes in market regulations, since the collapse of Lehman Brothers, have outlined practices that affect the price discovery mechanism. Price discovery is sensitive to many factors. For a specific execution venue, the following inputs may drive the price discovery mechanism: Number of buyers Number of sellers Number of items for sale in that trading period Number of recent sales or purchase price (this is the price at which items traded) Current bid price Current offer price Availability of funding Obligations of participants (e.g.