News and Media

Price discovery in an uncertain world

Published on 09 February 2023


If there’s one thing that markets hate, it’s uncertainty. Whether you are buying, selling or trading or even just trying to pick market trends for arbitrage opportunities, uncertainty and unpredictable volatility makes it all harder.

The primary reason people give for hating uncertainty, is that it makes it almost impossible to plan or forecast. When markets are lumpy and moving rapidly, procurement and suppliers alike see more risk, and risk of course has to be priced into the trade, stifling activity and making people more cautious.

Unpredictable markets

But there’s another key downside of unpredictable markets and rapidly changing prices, and that’s the lack of confidence that a trade negotiated yesterday is accurate and fair today. If your default method for trade is to call on your contact list of usual trading partners and gauge interest, that is fine in a stable and predictable market. Both parties understand the context in which they have agreed a trade, and both have a good feel for where the market price sits. But as we’ve seen, that’s not the case when prices are moving quickly. In those market conditions, only opening the trade opportunity to multiple buyers or sellers at the same time can create the real-time “average” that determines what the fair market price is. That’s where technology can help, and in particular digital trading platforms like Nui Marketplace.

Milk prices, Source: Fonterra

With milk supply issues and rising costs across the planet right now, the need for better certainty and fair price discovery is greater than ever. We can live better with volatility if we know that for any given trade, we have secured a fair market price. That in turn will increase confidence and subsequent activity. And as the market trades more, there are more data points created, more information available, and some of the volatility is flattened out. With that a greater certainty starts to return.

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