A process that involves finding the mix of quantity and price based on the interaction of both demanders and suppliers. The law of supply and demand states that demand for an item depends on its price, which is a function of scarcity. If an item is rare, it is expensive and vice versa. At higher and higher prices, demand decreases and vice versa. At some point, the high price induces suppliers to produce more of the thing, whereupon the price falls. Equilibrium consists of demanders and suppliers finding the acceptable mix of price and quantity.

In securities trading, however, the pricing process is like the pricing process in an auction. First, prices move a lot faster. Second, in an auction, demand for the item often rises as the price rises. Visible demand begets more demand. Auction economics are contrary to what traditional economics teaches — that demand will decrease as the price rises. In the auction
situation, demand increases as the price rises. The item may or may not be actually scarce in the real world. It doesn’t matter. The immediacy of the auction is what skews prices, sometimes to absurd levels. Later, when suppliers see the high prices, they may indeed be able to find or produce more of the item — but by then, the specific demand dynamic of that one auction is gone.

It is also known as price discovery process/ mechanism.