Concerning your questions on MM's. You have brought up many good questions, I will try as best I can to answer this somewhat complex topic.
What is the basis of the bid or ask spread increase or decrease without an accompanying volume or size movement to justify the change?
ANSWER: The market makers can adjust their bid or ask at any time. They are not obligated to wait at their current market for a buyer or seller.
Why does a major market maker jump from the bid to the ask?
Answer: Most frequently this is based upon order flow to his desk. Lets for argument sake assume that the market maker is trying to stay essentially flat in the 40 or 50 stocks they are responsible for. They do take positions on either side of the market, but the idea is to day trade and take advantage of the spread. Once in a while with a good gut feeling get long or short to take advantage of market swings.
If the MM is on the ask for 1000 shares, someone calls wanting to buy 10,000 shares, they may elect to sell them 10,000 shares. Now lets assume that the MM is now short 10,000 shares. He needs to cover as quickly as he can to take advantage of spread and limit market exposure. Now he adjusts his offering higher taking himself well above other MM's levels and moves his bid to the current level or an 1/8 higher thus making himself the best bid. When you are the best bid, you are going to buy stock. You just hope you can get all 10,000 covered at a price lower than what you sold your original 10,000 for.
This is one scenerio, there are many but it illistrates a MM moving from the ask to the bid quickly.
Sequence of MM's in line means nothing. The size and price are all that matters. If their is only one MM on the best bid, everyone will direct sells to that guy. If there are multiple, they will all be buying stock.
The market maker is obligated to honor his quote. No more, no less. If they are offering 1000 shrs at 20, as soon as someone calls and says I want those shrs, he can then adjust his market. If the buyer wants more he can either call multiple MM's or ask any one of them if they are willing to sell more than their published price at the same level.
My experience is that time and sales has always been accurate and quoted as "REAL TIME". Sometimes it takes a while to get printed, but is often used in trade disputes between MM's, Broker Dealers, and customers. The tape is GOD. Every once in a while there are misprints but you can generally pick them out as being way outside the market. Depends probably alot on your vender.
Does instinet bid ask drive the MM bid ask? The answer has to be yes and no. The MM's utilize instinet when trying to split bid ask, they are typically aware of offerings in the stocks they follow. Just another screen/system to help them determine where they want to be. Buying or selling.
Size is easily manipulated. You can put out there what ever you want. You will have to honor it though.
MM's or playing chess all day long with each other. Fast moving markets, they just try to keep their heads above water. slower markets are nice cash cows with good order flow.
Just one mans thoughts....
Forgive the spelling. |
