Hello, John!
Very good to see the thread stir...we have been a long time in the wilderness here. <ggg>
I found this interesting article on how MM's behave when dealing with hot BB stocks...I thought I'd share it with the thread:
>> Market Maker Speaks Out - Ways of a MM (Market Maker)
I was a OTC MM for about 10 years ending in the late 80's. Since
then I have been strictly an investor. Since I have not been that up to date in MM rules I will only make statements that I feel fairly confident are still accurate regarding these activities. By and large most MM don't have a clue nor do they care to learn, about the
fundamentals of the stocks they trade.
They just try to make orderly markets. When dealing with BB stocks
it is very easy for a MM to get trapped into being short in dealing in fast moving market. Reason being; most of the MM's in this stock are
what are called "wholesalers" this means they don't have retail
brokers "working" the stocks.
So they have to rely on whats know as the "call" from larger retail
houses. If a "Big" retail firm like an E-trade calls up a market maker
to purchase say 5,000 shares of a stock, they expect to get an
"execution" from that market maker. If he turns them down, or only
gives a partial then the "Big" firm will go to another MM.
If this second MM "fills the order" then that "Big" firm has a moral
obligation to continue to give future "business" in that stock to tha
MM who preformed (his life blood). This will go on until he "fails" to
perform and so on.
Contrary to popular opinion the "Big" firms Do NOT neccessarly go
to the "Low Offer" to fill a buy order (Or high bid for a sell). They
"Go" to who they think will perform to fill the order and expect that
MM to "match" the "low offer" in the case of a buy (bid in the case of
a sell). Even though this MM might in fact be the "high bid" and not
really want to sell any more.
As a wholesaler he must perform or he will get a reputation as a
"non-performer" with the "Big" houses and will cease getting "calls"
which means he will soon go out of business. I mentioned above that
this activity is very significant to BB stocks. I say this because most of the trades in these BB stocks are "unsolicited" and are done
through discount houses, ergo "Big" firms.
With the above groundwork laid, let me try to explain how market
makers get short even if they like the Company; Lets say that a stock
(shell) has been lying quitely at $.25 bid $.50 offered. A limit order
comes into one of the MM's to Buy at $.50 for a thousand shares.
Prior to this trade that MM may be "flat" (neither long or short any
shares). He fill the order and is now short 1,000 shares. He may raise
his bid hoping to find a seller to "flatten" out his position. But before he realizes it a wave of buyers have come in and cleared out all the $.50 offers. Now the stock is $.50 bid .75 offered. Here comes that "Big" firm he just sold the 1,000 shares to at .50 with another bid for 1000 at .75. He makes this print. Now he is short 2,000 at an average of .625. The market keeps moving and now its .75 bid 1.00 offered. Now he has to make a decision.
Just like investors, MM Hate to take a loss. So 9 times out of 10 he
will now sell 2000 at 1.00 making him short 4000 but with an average
.81. At this time he would love to see a seller at .75 so he can cover
his short and make a few bucks.
But instead the market keeps moving up. Now it is 1.00 to 1.25 and
here comes the buyer again at 1.25. He doesn't want to loose the call
so now he needs to sell 4,000 at 1.25 to keep his break even point
above the bid. Now he is short 8,000. Market moves up to 1.25 bid
1.50 offer here comes the buyer now he feels he must sell 8000 here
because "stocks don't go up forever".
Now he is short 16,000. And so on and so on. If the stock keeps
moving up, before he realizes it he could be short 50k or 100k shares
(depending how big his bank is). _________________________
Finally the market closes for the day and on paper he may look
allright in that his "break even" price may be around the closing price. But now he has to figure out how to entice sellers so he can cover this short. It is important to note that if this happened to one MM it has probably happened to most all of them.
Some ways MM's entice sellers; Run the stock up with a "tight
spead" in a fast market, then "open" up the spread to slow down the
buying interest. After it has "cooled off" for a little while lower the offer below th last trade right after a small piece trades on the offer then tighten the spread so that the sellers feel they can take a "quick profit" by "hitting the bid" on the tight spread.
Once the selling starts the MM's will walk it down quickly by only
making small prints on the way down with the tight spread. Another
way is by running the stock up in the morning, averaging up their
short then use the above technique to walk it down in the afternoon.
Hopefully after doing this for several days, it will demoralize the buyers. The volume will dry up and the sellers will materialize thinking that the game is over.
Contrary to popular opinion, MM usually Do Not Cover in Fast
moving markets either Up or Down if they are short. They Short
More. They usually try to cover after the frenzy is out of the market.
There are many other techniques they use but the above are the most
popular.
This technique works about 9 times out of 10 particulary in a BB
market. However that is because 9 out of 10 BB stocks are BS.
Remember what I said above. Most MM's don't have a clue as to the
value of a Company until they get trapped. If the Company has solid
fundementals and a bright future. Then the stock will do very well.
And the activity that caused the situation will prove to even help the
future stock activity because it created an audience."
________________________
The link for this article is:
wallstreetcity.com
Now, we have seen all of these techniques used on HTSF...they haven't worked, so we finally saw the shakeout of the stop-losses yesterday. I can't speculate as to how short the MM's were at 2:20 yesterday, but if 100,000 shares didn't let them cover their shorts, then we can expect more games next week.
But when the MM's DO go long....WATCH OUT!
Cheers!
Rick |
