Algorithmic traders buy and sell a commodity X — the price is set by their supply and demand
| Sellers | Volume |
|---|
| Buyers | Volume |
|---|
A market price is not set by anyone in charge: it emerges from thousands of separate decisions to buy or sell. When more people want to buy than sell, the price rises until fewer are willing; when sellers outnumber buyers, it falls. Economists call this price discovery, and it is why an ordinary exchange can react to news within seconds of it appearing.
Today most trades on large exchanges are placed by programs rather than by people. Some follow trends, some bet that prices will drift back to an average, some react to bursts of trading activity, and some — market makers — simply stand ready to buy and sell all day and earn the small gap between the two prices. Each strategy makes money in some conditions and loses it in others, and together they shape how calm or how wild a market feels.
Playing with a small artificial market is a good way to see why these things matter. A thin market with few willing traders swings wildly on modest orders, a burst of bad news can turn a steady climb into a rout, trading fees quietly eat the profit of frequent traders, and strategies that thrive in one kind of market can fail in another. Letting the weaker traders be replaced by copies of the stronger ones shows, in miniature, how competition sifts good ideas from bad.