Mark,
Speaking of volitility, I read with great interest the following post on the Motley Fool CMGI board.
Given your background, experience and extremely helpful contributions to this board, I'm hoping you might offer your own perspective on the role and behavior of Market Makers. Thanks.
KurtSS
Sort of. This is supposed to be the role of Specialists on the New York Stock Exchange, and Market Makers on the NASDAQ. Supposedly they keep markets fluid by buying when no one wants to buy and selling when no shares are available to sell.
Unfortunately, as you could guess, this is a tremendous power, and is open to all sorts of abuses. In essence, stock "prices" are just the levels the Market Makers feel like selling and buying at, which in part should be based on the supplies and demands they see. As wholesale investors, they can pocket the spreads between prices retail buyers are bidding and prices retail sellers are asking. Retail buyers and sellers include big institutions and small investors, though institutions have better tools than we small investors to get a reasonable price at any given time.
However, if you read about institutions like Jim Cramer's hedge fund, you'll see that they get creamed as often if not more than we do. The wholesalers have all the power.
Market Makers and Specialists can also route stocks at favorable prices to friends if they like. It's a real racket, and the only ones who can take advantage of this power are the ones who already have the power.
Electronic markets may one day reduce or eliminate the power of MM's and Specialists, but right now, they rule. They manipulate prices all the time -- they look to any news event as a chance to manipulate stock prices. They're the ones who make prices overrun on the upside and overcorrect on the downside; as individual investors, this knowledge is one of the few weapons we can actively apply to make a buck by buying when things overcorrect ("buy the dips") and
either holding long-term, or selling when things overrun on the upside ("sell into strength").
For example, when things looked "fantastic" for DELL (55 split-adjusted in late January), they were not nearly as good as the stock price would have you believe; if you were looking to sell, you sell into strength. Now, when things look "ugly" for DELL, they are probably not nearly be as ugly in reality as the stock price would have you believe; this is an opportunity to buy the dip. When things
look "fantastic" for DELL again, the MM will take the opportunity to correct it again. By acquiring shares when prices and demand are low, and unloading them to retail investors when prices and demand are high, the MM's make a healthy profit and keep the markets moving.
Remember always that prices are set at precise levels to psychologically entice retail investors. Price levels skew up and down just enough to make wholesale investors as much money as possible. They know the games -- like the fact that people buy in round lots or at round numbers -- and they move the markets accordingly. It's frightening when you think about such manipulation on a grand scale; every stock has its own Specialists or Market Makers to handle price
movements. Depending on who your broker is, you deal with the broker's
Specialists or Market Makers. For example, Schwab's Market Makers for
GNET gave me a terrible fill during a "fast" market and pocketed nearly a thousand bucks of what would have been my profit in delaying my purchase of several hundred GNET shares by a minute or two and keeping a large spread of more than a dollar between the bid and the ask when my order finally came to market. I called Schwab and they refused to give me the difference; needless to say, my days at Schwab are numbered.
A good place to learn more about Specialists and Market Makers is Richard Ney:
w3.trib.com
I wouldn't go out of my way to follow his "advice for the retail investor", but many of the scenarios he describes about abuses of power by Specialists, I believe, are still very much happening today with Market Makers, too.
Market Makers are a better explanation of why CMGI's stock price darts all over the place than any other explanation I've heard. They take advantage of the low float and shifting demand to shoot this stock price all over the place. The talking heads on the television and the "journalists" in the media just play along with the game; in reality, short-term news event sound bites don't move stock prices... the Market Makers and Specialists do.
Longer term, CMGI's stock price trend is based on CMGi's earnings trend; shorter term, anything can happen and often does. |
