what is price discovery 
price discovery is the process conducted between buyers and sellers whether explicit or inferred of setting the spot price or the fair price of any asset that is being traded it includes evaluating tangible and intangible factors including supply and demand investor risk attitudes and the overall economic and geopolitical environment simply put price discovery is the point at which a buyer and a seller agree on a price and a transaction occurs the balance between buyers and sellers is a key factor in price discovery the law of supply and demand is the main factor driving price understanding price discoveryat its core price discovery involves finding where supply and demand meet in economics terms the supply curve and the demand curve intersect at a single price which then allows a transaction to occur the shape of those curves is subject to many factors from the size of the transaction to background conditions of previous or future scarcity or abundance location storage transaction costs and psychology also play a role there is no specific formula using all these factors as variables indeed the formula is a dynamic process that can change frequently if not from trade to trade while the term itself is relatively new price discovery has been around for millennia as a process ancient souqs in the middle east and marketplaces in europe the indian subcontinent and china brought together traders and buyers to establish acceptable prices of goods in modern times derivatives traders in the pits of the chicago mercantile exchange cme used hand signals and verbal cues to signal prices for a given commodity electronic trading has replaced most of the manual processes with mixed results while it has significantly increased trading volumes and liquidity electronic trading has also resulted in more volatility and less transparency about large positions price discovery as a processprice discovery is the central function in any marketplace whether it is a financial exchange or a local farmer s market the market brings potential buyers and sellers together with members of each side having very different reasons for trading and varying styles for doing so by bringing buyers and sellers together marketplaces allow the interested parties to interact and by doing so a consensus price is established whether they re consciously aware of it or not all the players do it again to set the very next price and so on price discovery is influenced by a wide variety of factors among these factors are the stage of market development its structure security type and information available in the market those parties with the freshest or highest quality information have an advantage as they can act before others get that information when new information arrives it changes both the current and future condition of the market for that asset and therefore can change the price at which both sides are willing to trade too much transparency in information can be detrimental to a market because it increases the risks for traders moving large or significant positions price discovery vs valuationprice discovery is not the same as valuation price discovery is a market driven interactive process while valuation is a model driven mechanism valuation is the present value of presumed cash flows of an asset based on many factors including interest rates competitive analysis and technological changes both in place and envisioned other names for valuation of an asset are fair value and intrinsic value by comparing market value to valuation analysts can conclude whether an asset is overpriced or underpriced by the market the market price is considered the correct price but any differences can provide trading opportunities if and when the market price adjusts to include any information in the valuation models not previously considered 