How is the price of VXX determined?
"Generally, ETFs work on the basis that there exists a pair of values that can be taken at any moment in time: A Net Asset Value of each share in the fund and a trading market price of each share in the fund.  It may help to picture these in baskets of about 50,000 shares for the creation/redemption process. If the NAV is greater than the market price, then arbitrageurs will buy up shares at the market price and do an ""in-kind"" transaction that will be worth the NAV value that the arbitrageurs could turn around and sell for an immediate profit. If the market price is greater than the NAV, then the arbitrageurs will buy up the underlying securities that can be exchanged ""in-kind"" for shares in the fund that can then be sold on the market for an immediate profit. What is the ETF Creation/Redemption Mechanism? would be a source on this though I imagine there are others. Now, in the case of VXX, there is something to be said for how much trading is being done and what impact this can have. From a July 8, 2013 Yahoo Finance article: At big option trade in the iPath S&P 500 VIX Short-Term Futures Note   is looking for another jump in volatility.  More than 250,000 VXX options have already traded, twice its daily   average over the last month. optionMONSTER systems show that a trader   bought 13,298 August 26 calls for the ask price of $0.24 in volume   that was 6 times the strike's previous open interest, clearly   indicating new activity. Now the total returns of the ETF are a combination of changes in share price plus what happens with the distributions which could be held as cash or reinvested to purchase more shares."
"Their algorithm may be different (and proprietary), but how I would to it is to assume that daily changes in the stock are distributed normally (meaning the probability distribution is a ""bell curve"" - the green area in your chart).  I would then calculate the average and standard deviation (volatility) of historical returns to determine the center and width of the bell curve (calibrating it to expected returns and implied volaility based on option prices), then use standard formulas for lognormal distributions to calculate the probability of the price exceeding the strike price. So there are many assumptions involved, and in the end it's just a probability, so there's no way to know if it's right or wrong - either the stock will cross the strike or it won't." "Anthony Russell - I agree with JohnFx. Petroleum is used in making many things such as asphalt, road oil, plastic, jet fuel, etc. It's also used in some forms of electricity generation, and some electric cars use gasoline as a backup form of energy, petrol is also used in electricity generation outside of cars. Source can be found here. But to answer your question of why shares of electric car companies are not always negatively related to one another deals with supply and demand. If investors feel positively about petroleum and petroleum related prospects, then they are going to buy or attempt to buy shares of ""X"" petrol company. This will cause the price of ""X"", petrol company to rise, ceteris paribus. Just because the price of petroleum is high doesn't mean investors are going to buy shares of an electric car company. Petrol prices could be high, but numerous electric car companies could be doing poorly, now, with that being said you could argue that sales of electric cars may go up when petrol prices are high, but there are numerous factors that come into play here. I think it would be a good idea to do some more research if you are planning on investing. Also, remember, after a company goes public they no longer set the price of the shares of their stock. The price of company ""X"" shares are determined by supply and demand, which is inherently determined by investors attitudes and expectations, ultimately defined by past company performance, expectations of future performance, earnings, etc.. It could be that when the market is doing well - it's a good sign of other macroeconomic variables (employment, GDP, incomes, etc) and all these factors power how often individuals travel, vacation, etc. It also has to deal with the economy of the country producing the oil, when you have OPEC countries selling petrol to the U.S. it is likely much cheaper per barrel than domestic produced and refined petrol because of the labor laws, etc. So a strong economy may be somewhat correlated with oil prices and a strong market, but it's not necessarily the case that strong oil prices drive the economy..I think this is a great research topic that cannot be answered in one post.. Check this article here. From here you can track down what research the Fed of Cleveland has done concerning this. My advice to you is to not believe everything your peers tell you, but to research everything your peers tell you. With just a few clicks you can figure out the legitimacy of many things to at least some degree." Who determines company value at IPO? The Owners based on the advice from Lead Bankers and other Independent auditors who would determine the value of the company at the time of listing. At times instead of determining a fixed price a range is given [lower side and higher side]. The Market participants [FI / Institutional Investor Segments] then decide the price by bidding at an amount. There are multiple aspects in play that help stabalize the IPO and roles of various parties. A quick read of question with IPO tag is recommended Edits: Generally at a very broad level, one of the key purpose of the IPO is to either encash Owner equity [Owner wants some profits immediately] or Raise additional Capital. More often it is a mix of both. If the price is too low, one loose out on getting the true value, this would go to someone else. If the price is too high, then it may not attract enough buyers or even there are buyers, there is substantial -ve sentiment. This is not good for the company. Read the question From Facebook's perspective, was the fall in price after IPO actually an indication that it went well?  This puts determining the price of IPO more in the realm of art than science. There are various mechanism [Lead bankers, Institutional Investors, Underwriters] the a company would put in place to ensure the IPO is success and that itself would moderate the price to realistic level. More often the price is kept slightly lower to create a positive buzz about the stock. "How do treasury auctions work? First, the US government will issue a notice indicating how much money it would like to borrow. Below is an actual announcement issued by the treasury department that it will be having an auction to raise $23 billion.  The announcement indicates the date of the auction (March 8th, 2011 in the example) as well as deadlines for competitive (11:30 AM) and noncompetitive (11:00 AM) bids. If you would like to participate in the auction then your bids must be submitted before these times. Competitive Bid - the bidder specifies the maximum price they will pay for the security. All treasuries are priced in $100 so bids are submitted in terms of buying a security that will repay the owner $100 when the security matures ($100 is the face or par value). Noncompetitive Bid - the bidder does not specify any maximum price requirement. These bidders are first in line to be issued a bill but they will get whatever price is determined at auction. There is a limit of $5 million that can be submitted as a noncompetitive bid per bidder per auction. For competitive bids any one customer can be awarded a maximum of 35% of the total offering. In order to better illustrate the mechanics of the auction let's go back to the example. The table below is a hypothetical list of bids for the $23 billion being issued. The bids include the total amount the bidder is willing to purchase as well as the maximum price the bidder will pay based on a $100 par value note. Bid 1: $5 billion, max price: don't care (noncompete) Bid 2: $10 billion, max price: don't care (noncompete) Bid 3: $5 billion, max price: $98 Bid 4: $5 billion, max price: $95 Bid 5: $10 billion, max price: $92 Bid 6: $5 billion, max price: $90 Notice there is a total of $40 billion in bids. The auction is only for $23 billion. This means some bids will go unfilled. The ratio between bids and the amount of the auction is called the bid-to-cover ration. For our example it is 1.74 ($40/$23). A high bid-to-cover ratio indicates a strong demand for the bonds since there are a lot of bidders. A low ratio indicates weak demand. A ratio under 2.0 is considered weak. The bids are filled in the following manner: Results of our example auction: Bid 1: $5 billion, max price: noncompetitive, All $5 billion filled at $95 Bid 2: $10 billion, max price: noncompetitive, All $10 billion filled at $95 Bid 3: $5 billion, max price: $98, All $5 billion filled at $95 Bid 4: $5 billion, max price: $95, Only $3 billion filled at $95 Bid 5: $10 billion, max price: $92, Not filled Bid 6: $5 billion, max price: $90, Not filled Once the auction is completed the treasury will post the results of the auction. Below is the actual results of the auction.  There are some additional items that are reported from the auction: High Rate: This is the highest yield (or the lowest price) that was accepted at the auction. For our example this would be $95. Allotted at High: This is the percentage of the total that was filled at the highest accepted yield (or lowest accepted price). For our example, the last $3 billion we filled was at the lowest price so our allotment at high would be $3/$23 = 13%. Price: Price as determined by the auction. Median Rate: Half of the competitive bids were submitted below this rate while the other half were above. Low Rate: The lowest yield (or highest price) submitted for the competitive bids. The announcement also shows the breakdown of the amount of bids submitted noncompetitively versus competitively and how much was rewarded for those same categories. There is an entry in the middle of the results announcement listed as SOMA. This stands for System Open Market Account. This represents treasuries that are held by the Federal Reserve. If the Federal Reserve has treasuries that are maturing then it is expected that they will use the proceeds from those maturing treasuries to buy new treasuries. For our example auction the FED had no bills maturing at the time. If they did then the FED would also get the same price determined at the auction. Here is an article I wrote with a little more detail on the auction process.  I've included my sources at the end of the article. As for treasuries being a ""safe"" investment?  I'm not so sure.  Right now the yield on 10 years is around 2.5%.  Who, in their right mind, would lend money to the government for 10 years at 2.5%?  Not me." "It seems this will be very much driven by price discrimination.  If there are some customers who will pay up to $100, sell at that; and if there are others who'll pay $1 sell at that price. For instance you see computer games, which have zero marginal cost of production, sold at ""normal new release"" prices, at premium prices with a special box or doo-dad, and at discount prices once the game is a bit old." "Without any highly credible anticipation of a company being a target of a pending takeover, its common stock will normally trade at what can be considered non-control or ""passive market"" prices, i.e. prices that passive securities investors pay or receive for each share of stock. When there is talk or suggestion of a publicly traded company's being an acquisition target, it begins to trade at ""control market"" prices, i.e. prices that an investor or group of them is expected to pay in order to control the company.  In most cases control requires a would-be control shareholder to own half a company's total votes (not necessarily stock) plus one additional vote and to pay a greater price than passive market prices to non-control investors (and sometimes to other control investors). The difference between these two market prices is termed a ""control premium.""  The appropriateness and value of this premium has been upheld in case law, with some conflicting opinions, in Delaware Chancery Court (see the reference below; LinkedIn Corp. is incorporated in the state), most other US states' courts and those of many countries with active stock markets. The amount of premium is largely determined by investment bankers who, in addition to applying other valuation approaches, review most recently available similar transactions for premiums paid and advise (formally in an ""opinion letter"") their clients what range of prices to pay or accept. In addition to increasing the likelihood of being outbid by a third-party, failure to pay an adequate premium is often grounds for class action lawsuits that may take years to resolve with great uncertainty for most parties involved. For a recent example and more details see this media opinion and overview about Dell Inc. being taken private in 2013, the lawsuits that transaction prompted and the court's ruling in 2016 in favor of passive shareholder plaintiffs.  Though it has more to do with determining fair valuation than specifically premiums, the case illustrates instruments and means used by some courts to protect non-control, passive shareholders. ========== REFERENCE As a reference, in a 2005 note written by a major US-based international corporate law firm, it noted with respect to Delaware courts, which adjudicate most major shareholder conflicts as the state has a disproportionate share of large companies in its domicile, that control premiums may not necessarily be paid to minority shareholders if the acquirer gains control of a company that continues to have minority shareholders, i.e. not a full acquisition: Delaware case law is clear that the value of a dissenting [target company's]   stockholder’s shares is not to be reduced to impose a minority   discount reflecting the lack of the stockholders’ control over the   corporation. Indeed, this appears to be the rationale for valuing the   target corporation as a whole and allocating a proportionate share of   that value to the shares of [a] dissenting stockholder [exercising his appraisal rights in seeking to challenge the value the target company's board of directors placed on his shares]. At the same   time, Delaware courts have suggested, without explanation, that the   value of the corporation as a whole, and as a going concern, should   not include a control premium of the type that might be realized in a   sale of the corporation." "I've alway thought that it was strange, but the ""price"" that gets quoted on a stock exchange is just the price of the last transaction. The irony of this definition of price is that there may not actually be any more shares available on the market at that price. It's also strange to me that the price isn't adjusted at all for the size of the transaction. A transaction of just 1 share will post a new price even if just seconds earlier 100,000 shares traded for a different price. (Ok, unrealistic example, but you get my point.) I've always believed this is an odd way to describe the price. Anyway, my diatribe here is supposed to illustrate the point that the fluctuations you see in price don't really reflect changing valuations by the stock-owning public. Each post in the exchange maintains a book of orders, with unmatched buy orders on one side and unmatched sell orders on the other side. If you go to your broker and tell him, ""fill my order for 50,000 shares at market price"", then the broker won't fill you 50,000 shares at .20. Instead, he'll buy the 50 @ .22, then 80 @ .23, then 100 @ .30, etc. Because your order is so large compared to the unmatched orders, your market order will get matched a bunch of the unmatched orders on the sell side, and each match will notch the posted price up a bit. If instead you asked the broker, ""open a limit order to buy 50000 shares at .20"", then the exchange will add your order to the book: In this case, your order likely won't get filled at all, since nobody at the moment wants to sell at .20 and historically speaking it's unlikely that such a seller will suddenly appear. Filling large orders is actually a common problem for institutional investors: http://www.businessweek.com/magazine/content/05_16/b3929113_mz020.htm http://www.cis.upenn.edu/~mkearns/papers/vwap.pdf (Written by a professor I had in school!)" "The fallacy in your question is in this statement: ""The formulas must exist, because prices can be followed real time."" What you see are snapshots of the current status of the stock, what was the last price a stock was traded at, what is the volume, is the price going up or down.  People who buy and hold their stock look at the status every few days or even every few months. Day traders look at the status every second of the trading day.  The math/formula comes in when people try to predict where the stock is going based on the squiggles in the line. These squiggles move based on how other people react to the squiggles.  The big movements occur when big pieces of news make large movements in the price. Company X announces the release of the key product will be delayed by a year; the founder is stepping down; the government just doubled the order for a new weapon system; the insiders are selling all the shares they can. There are no formulas to determine the correct price, only formulas that try to predict where the price may go."