<OT> Teflon, can institutions influence trading? Absolutely. It happens all the time.
Here are some facts: Every stock has its dominant MM(s) – called axes. Those can also be institutions which in addition to making a market in a stock, have their own shares of the stock. For MSFT, f.ex. GSCO is an ax (as is MLCO), and they both make a market in MSFT, and have extensive holdings of MSFT stock. Theoretically, there is supposed to be some separation between the two divisions, but in practice…
Now, I am not talking about illegal activities that MMs engage in. So happens that they do it all the time – as a full-time daytrader, I can cite for you numerous instances where actually illegal activity is taking place (violation of Manning rules, display rules regarding size and quote, violation of time limits, ignoring orders, trading around, collusion etc., etc., etc.). Sometimes I fight particularly flagrant abuses on my trades, but most of the time, I try not to deal with MMs, and do my business entirely through ISLD. However, here I'll concentrate on entirely legal means by which an institution can significantly impact trading in a security.
The MM has certain obligations to display minimum size – but this is routinely distorted. I happen to think the minimum has been set too low, and so, is virtually useless as a guide. As a trader, you are familiar with this, I'm sure: on the L II, a lone MM is sitting on the inside quote with a symbolic 1 as size (meaning, displaying 100 shares) – meanwhile, on the T&S trades are flying fast and furious – 10s of thousands of shares, and dozens of trades at his price. Meanwhile, you have the ISLD, ARCA, ATTN books open and there is no depth to show crossing, and in fact all ECNs are sitting several levels down on the LII. Sure, there are some are hidden orders (as ISLD lets you do), but I've seen this on stocks that are too thinly traded to have any real ECN involvement, and exactly the same thing is happening. Bottom line, you never know how many shares an MM has for sale, and he can refresh his quote/size as many times as he pleases.
Another fact: Traders watch MMs very carefully, and especially they watch the ax (dominant market maker on the stock) - you will often see the MM pretending to sit on the bid side (often one level below, rather than at the inside quote) to make it appear that he is interested in buying, and very far down on the ask side, to make it appear that he's not interested in selling. Meanwhile, he is selling furiously through INCA, and you see massive orders going off at the bid price (usually sells) on the T&S. He is unloading shares, and getting you to support the price.
Here is how a lot of fun can be had. MMs know that it often takes surprisingly little to move a stock, even a very liquid stock like MSFT. That is easier at certain times than at others. Traders watch for “inflection” points, where the bid/ask on the LII looks balanced and the traders are trying to figure out which way the stock will turn. At that moment, if an ECN like INCA suddenly appears on a bid/ask, with a massive sell/buy of 10-100K block, the traders can quickly decide that that is where the action is headed. Meanwhile, there is nobody out there realistically, who is going to buy the 100K immediately, especially that it comes behind the MM (trades go off in order of who appears first on the inside quote), and the price drops (if it is on the ask side), at which point the 100K appears again at the next level and so on until the price has been driven down – then suddenly the 100K order disappears (is withdrawn). Traders call this flashing.
Let us see how f.ex. FBCO might drive the price of NITE down. I'm picking this example, because I've witnessed this in the last few trading sessions. FBCO is an ax in NITE and is carefully watched. The stock reaches certain inflection points, which often happen around the whole number (in this case, it was a critical level of 60). Well, last Friday, NITE opened very strongly at 63 1/4, in fact gapped up by 2 points from Thursday's close, and moved then moved up a bit. At that point, FBCO appeared on the ask side on LII, and started selling. Now, it is immaterial whether they were selling stock they had (f.ex. GSCO, a MSFT ax, has a lot of MSFT), or were shorting (BTW, MMs can sell shares naked – and are not bound by any downbid rule like ordinary traders are). The point is, they broke the momentum of the stock by very steady selling. This spooked traders, who started selling, when they saw that FBCO was determined to keep selling. Soon they were joined by other traders, who smelled an opportunity, and who jumped in to short. Now you have a torrent of shares hitting the market, and no way can the buy side absorb it. The price drops – that stops buyers, because they look for a) cheaper price or b) are afraid to buy at the top. FBCO continues this business of selling, but they don't actually have to expend a lot of effort. What would happen, is that the stock would acquire downward momentum and fall without FBCO actively participating – they would just shadow the move, by hanging back a level or two showing a desire to sell, and reluctance to buy (let us say the ask now is at 61 1/8, and going down, while FBCO is showing 61 1/4, and a bid of only 60 while the best bid is 60). Then the stock finds its new support level – at 61 – now the bid side seems balanced with the ask side, and the stock is hovering – while traders are trying to figure out whether to buy or sell. That's when FBCO jumps in with a sell order (just a symbolic one is all it takes) – traders immediately react by selling and also by going *short* (as I eventually did on NITE, once I figured out what was happening). Actually, perhaps FBCO did most of their selling originally at 63 ½, and afterwards, all they had to do is “shadow” and at critical inflection points, provide guidance with a few symbolic share sells. The traders/investors and the momentum crowd will do the rest. This way, FBCO drove NITE to the 59 level, which is below the carefully watched 60 level that was initial resistance (and attempted support level). Now came the critical moment. Bargain hunters might come out, so this calls for more aggressive measures if the price is to be driven further down. Well, FBCO appeared at the inside ask with a 10 size, and immediately behind, REDI (an ECN) appeared with a 100 size. That threw the market into a panic, as it appeared that the floodgates had opened. Immediately ISLD appeared with a 90, CIBC and several other MMs fell into place (while there can be collusion, and many MMs had to settle w/ the SEC for collusion, this need not be the case; often the other MMs watch the ax for clues, and so they follow their lead – but there is no actual communication “hey lets pull this off”). Well, panic broke out, and the price dropped real fast – and on the way down, it was chased by this huge REDI sell order of 100 size. Before it was over, NITE hit 56 3/8 and closed the day at 57 ½. Nice work, for a stock that gapped up to 63 1/4, and hit 63 ½ - down to 56 3/8 and 57 ½. What is interesting is the dynamic of it. Look at how the trades actually played out: FBCO, after the initial selling, never really had to sell; all they had to do, was to appear on the ask side – and then, they could easily use an ECN like REDI or INCA to “flash” a big order of 100K to panic the traders – note, that since trades are executed in the order on which they appear on the LII, FBCO who was first, only had to actually put up for sale, a small amount, and because their REDI shares came second, nobody had a chance to take them up on that order”!!! The price dropped, and the maneuver was repeated – but how did the panic work? I looked at the ISLD book to see what was happening. Many traders/investors set stops on the way down (usually stupidly at whole numbers). As the price moved down, it triggered stops, unleashing sell orders. Plus, on the ask side, there was panic – because the price was falling so fast, people never had a chance to get their sell orders executed (and so, BTW, the REDI 100 size was always safe<g>), and they kept lowering the price they were willing to accept. Actually, when the price falls very fast, it does not *have* to happen on big volume (since there is not enough time to execute the orders, and no buying support from spooked traders) – that is why I often watch the intraday chart volume readings to see if a sell-off is for real or just a headfake, and volume often tells the tale. But anyway, getting back to our story. The thing to notice, is that the 100 size that FBCO was flashing, never actually got used! It was all a display! My point is, that very economically, for relatively few shares, you can drive the price down significantly. BTW, if you look at the T&S, you will often see if the order is just flashing, because you will never see an actual trade go off on the volume the flashing indicated. And flashing is not illegal. Even if it were, it would be impossible to prove. Every trader has the experience of having put in an order, and then changing their mind. I do it almost every day. I put in an order on ISLD, it shows up on LII, but I suddenly don't like what I see, and I cancel. If someone made a decision based on my 1K block appearing on LII, I can't help it. I can also tell you that I have personally seen my orders influence the market. And not just on some thinly trades issue. But here is the kicker: it doesn't matter, if in FACT, the MM is selling the shares (or shorting, as the case may be). Imagine, that in fact, FBCO was selling every share they could get their hands on (which in reality I believe is what happened). Well, guess what? All the more profitable for them!!! They drove the price down, and rebought much lower – made a killing. If they were long, then they sold high 63 ½, etc, and bought low 56-57. Profit, and a lower mean cost of their shares. Or if they shorted, they covered lower, and made a killing. So, why *shouldn't* they sell the very shares which they later re-buy lower? And if they want the shares to go up, because they have big holdings? Easy as pie – you drive up the price, or simply quit depressing it. Haven't you heard of “shaking the tree”? That's how MMs often shake out weak hands, and then the stock rockets up. It is called trading, and it is all legal – of course since MMs regularly overreach they do many illegal things as well (greed knows no limits), and that is why you regularly hear about the SEC settling with this or that MM, or brokerage.
So, are MMs all-powerful? No. When there is some very powerful good news on a stock, or the demand is huge on a small float, MMs can lose their shirts if they are caught on the wrong side of the trades. This is how many MMs have sustained huge losses in internet stocks in 1998 (they sold shares they didn't have, either as shorts, or to provide liquidity, i.e. make a market). Of course, what do they do? They modify the rules to make it easier for themselves to play games (manual execution rip offs, stock halting etc.).
And while it is of course easier to play these games on thinly traded stocks, believe me, it is quite easy to do so on the biggest ones too (barring circumstances like I described: huge demand due to news etc.).
Finally, it is all a game where *everybody* participates. It is called “managing” a stock, and net companies executives are masters at it. Well, so is MSFT. MSFT “manages” expectations. They need to have a stable stock – so they massage numbers (the SEC is looking into allegations MSFT has been “smoothing” their numbers), they “guide” analysts, and institutions that have huge holdings of MSFT also loosely control the stock price. All are complicit. At a brokerage, the analyst works with their traders, who work with their portfolio managers. And often they work with the companies first (all these unethical disclosures of news to analysts first – even the SEC is looking into this practice, it is so widespread). It is in nobody's interest, to have MSFT rocket up to some crazy height, and then burst violently down. So, when MSFT hit 95 back in April, I figured it is time for “consolidation” – and I called it ahead of time, on this board. I then watched for institutional action, as they sold MSFT and drove it down, and were touting the “cyclicals” baloney. Pump and dump. And the analysts are always a hoot. I just watch what they do, and then as a trader I take advantage of it as best I can. The plain fact, is that you can't have MSFT climbing constantly until it crashes. It is far better to “digest” “consolidate” and then move higher again, but starting from a lower level. It is in everybody's interest: institutions, MSFT, shareholders, and smart traders. Look at the history of MSFT – spurt, consolidation, spurt, consolidation. Remember, MSFT is a 400 billion dollar company. You cannot have it rocket toward the heavens like a smaller stock – you are talking trillions of dollars at that point. I keep my MSFT like a true foundation of my portfolio. I trade it occasionally. But for the rocket type moves, I go to JNPR – today's gain 17 points, following yesterday's big gains too (too bad I missed RBAK) - hey, they are small enough to sustain such moves. MSFT is a big tanker. Stable, steady, strong. It is not a rocket.
There are many other ways in which MMs play games, but I hope this shows just a few ways in which an institution can control a stock to a considerable degree. Sorry for the length of this post.
Morgan
|
