Why are stock prices so time sensitive?

Question

It seems like the vast majority of all goods and services don't change price so often.

I guess I should be careful the way I say this, because as far as I understand, they're actually very information sensitive.

So what I really mean is, why do they have 2 second ticks where the price might change, rather than changing daily to adjust for information? It seems like a 2 second tick is a little over the top.

If it is really necessary to have such a frequent possible update of prices, why do other goods and services not need that? Or which ones also do?

Answer 1

Prices changing so frequently is simply the result of an adjustment between demand and supply in the market. Demand and supply change all the time, because market venues allow them to change very frequently, and so does the prices. This does not mean that the fundamentals of the underlying assets are also changing, this is just the way market process (what it perceives as) new information.

Say the price of a stock is $x_0$ and I'm about to buy 1,000 units of that stock. Effectively, I will buy those 1,000 units at a price $x_1>x_0$ because at a given point in time demand increases so the price adjusts. However, if there is no new information, it's likely that somebody else would want to sell 1,000 units after that, and then the price would adjust downward at $x_2<x_1$. Note that we do not necessarily have $x_1=x_0$ though. It depends on much more factors that in my simple example, but the idea is there.

The price changing a lot, also means that you, as an investor, are able to buy/sell at any point in time. If, as you said, prices were updated once a day, that means that you would be able to make a transaction only once a day. Actually this exists on some market, and in general the price is set through an auction process. But obviously, if possible you want to be able to buy/sell at the moment you take the decision, and in general you would dislike to wait until the daily batch processed.

Regarding, the high frequency that the most liquid markets have reached now, this is the result of the competition between market venues. Indeed, in current days, there are often several places where you can buy/sell a particular stock for instance. Since market venues are seeking to attract the largest possible amount of transaction on their market, for liquidity reasons, this results in market competing on the frequency they offer to market participants.

Actually, this is a bit more complicated, let me just sketch up some words. Algorithmic traders are the type of market participants that provide a lot of liquidity because their are able to buy/sell extremely fast, there are the new market makers in a sense. The people who set up those algorithms (large banks mostly) are also seeking for profit. They know that high-frequency will make them more efficient than classic human investor, so they are looking for the fastest possible way to make transaction on a market. And market platforms, wanted to attract those liquidity traders (the algorithmic traders), have increased (a lot) the frequency of their market. This is not necessarily bad, actually if you buy/sell something on a exchange-market, it's likely that your counterparty will be an algorithm. The question of whether it's efficient or not, especially in time of crisis, is more opinion-based and there are some research on that issue.

Answer 2

While the prices of equities do fluctuate in response to information about the underlying enterprises, this is not the first order or likely even second order reason why they do so.

Discount-rate variation is the central organizing question of current asset-pricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in price-dividend ratios due to variation in expected cashflows. Now it seems all price-dividend variation corresponds to discount-rate variation

Presidential Address: Discount Rates JOHN H. COCHRANE (2011)

It is much more, as suggested by @Denesp, that changes in the discount factor of future earning and the supply and demand fluctuations for the individual security explain the small time scale fluctuations.

Two other things worth noting.

1. The stock market is a market where the norms and technology have been arranged to make it much easier to rapidly change prices. In contrast, the fixed price of the 6.5 ounce bottle of Coca-Cola from vending machines held for 73 years when vending machine technology, the limited variety of coinage, and long running contracts made it difficult for the company to adjust prices.
2. We should be careful to distinguish markets where prices can't change frequently from those markets where there is no reason to change them frequently. The ways in which prices are posted in the supermarket makes it difficult to change them too frequently or all the staff would do would be change prices. In contrast, an employer learns very little about worker productivity from minute to minute and so has little reason to change salaries at high frequency. But when it is economical to do so, prices of conventional goods can be repriced quite frequently. Gas prices usually change at night but sometimes change midday when there is a refinery breakdown. In countries experiencing hyperinflation prices of even simple staple goods can change multiple times per day.

Answer 3

Stock prices are not adjusted by some authority according to the latest information about the companies.

Stock prices simply show the last price at which a share of the company was sold on the stock market. If a new deal is reached every second then there will be a new price every second. Because of largely automated trading this is indeed probable for the shares of some large companies.

As Louis B. points out in his highly detailed answer ideally these price changes do reflect newly available information about the companies.

Answer 4

Some goods and service prices change every second too. Commodity prices is just one example and forex rates is another. I think, share prices change every second because of speculation in the market. Generally, given the semi-efficiency of financial markets, we would expect slower movements. Also, much of algo trading, which is about trading on trend rather than fundamental factors, is based on "trader"'s ability to ride i.e. understand the "price trends". These "traders" analyse the past behaviour in little less than a second, the past behaviour could be fluctuations from the past 10 seconds, this tells a lot to the "trader".