Secret life of a share

By Adam Shaw Working Lunch's markets expert

Buying or selling shares has become a pretty straightforward process these days.

You call up your broker, tell them what shares you want to trade and it's all done and dusted.

But what actually happens to those shares?

In fact, your call actually sets off a complicated series of events.

Your dealings are with the broker, but although they take your order, they don't actually carry it out.

They call a retail service provider - what used to be known as a market maker. These are basically upmarket brokers - the likes of Morgan Stanley, Merrill Lynch and Dresdner Kleinwort.

Computer system

They agree to sell the broker's client a share at a certain price.

At this point, having agreed a deal in principle, both the broker and the retail service provider send details to a computer system called Crest.

Crest is what is known as a settlement system. It records the price and the deal is done.

Sounds simple so far, but actually deciding on a price for the transaction can be much more complicated.

For most people, the share price they get is whatever the retail service provider offers.

That is arrived at by either side negotiating from their position.

The Ask price - this is the price people want to sell at.

The Bid price - this is what they want to buy at.

Somewhere in the middle you find a price at which other deals are being done.

For an example, I've taken an order book for Marks & Spencer shares - this is the actual information the broker will see.

Here the middle line is 309.75 - that's the price previous brokers have been paying.

One broker is offering 12,000 shares at 310p. But no-one is going to buy them at the moment because they can see that the current price is only 309.75p.

However, there are lots of people willing to trade.

Looking at the book for another share, Antofagasta, I found there was a big difference.

Everyone who is selling shares is looking for the same price - 920p. But they're unlikely to find takers, because the buyers are willing to pay no more than 910p.

Now, these deals are all done on a systems called SETS. It fixes the prices for shares of companies in the FTSE 100 index.

It's quite a mysterious system because you don't know who you are dealing with - it's just numbers on a screen.

There is an older system which is still used for smaller shares - it's called SEAQ.

I've taken a page for Premier Oil. This tells a broker what all the different market makers are willing to pay.

The current best market price for the share is 340p to sell and 350p if you want to buy.

Here you can see who you are dealing with. For instance, Dresdner - that's DRKW - is willing to buy at 340p, which is the best deal in the market, but they are only willing to sell at 355p.

Clearly, you wouldn't buy from them when you can get the same share from Deutsche Bank (DEUT) for 350p. So you can deduce that Dresdner is keener to buy than to sell.

Once you've put down the phone on your broker, you might think the deal is done.

But in every share transaction, there's plenty going on behind the scenes that most investors are completely unaware of.