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Technology Stocks : VALENCE TECHNOLOGY (VLNC)
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To: kolo55 who wrote (14625)9/18/1999 2:53:00 AM
From: Harold Hertzfeld  Read Replies (5) of 27311
 
Paul,

I was reviewing your explanation of how the market makers can use their long stock position to drive a stock down by selling at the bid prices.

Although I have shorted often I am still trying to come to terms with this dialog between you and Rich. I really do feel somewhat lost. Let me take a different approach. I hope you do not mind correcting and commenting on the following. Thanks.

If a market maker is selling stock aggressively to push the stock price lower he would certainly expect to scare
some innocent stockholders into selling their stock "at the market"--at the bid price--in hopes of salvaging something of their original investment. The MM anticipates that this panic selling will take place as a result of his selling actions. The MM then expects to profitably buy back the stock that he sold earlier at the new lower price.

But a market maker normally would not carry an inventory of stock over night. And therefore bright and early in the morning he would not have a stock position to sell for the above purpose.

I believe that John C told us that a MM can short a stock on a downtick in the normal course of "making a market' for the stock. This would give the MM the right to "sell" the stock at the beginning of the day at the bid to encourage the desired selling wave. And as long as he covers this short position before the market closes the same day he would not have to worry about "borrowing the stock to make the short sale possible." (He is governed by a different set of rule than the rest of us.) At the end of the day he goes home "flat" i.e, with no inventory of the stock and hopefully for him a profit.

Now if the above market maker also had a customer who has a stock position that he was intending to use to to drive the stock price down the market maker could sell this stock at the bid also. At the end of the day he could simply buy the stock back for his customer at the new lower price and also buy back the stock he needed for his own account.

With the team approach the investor sells at the bid.. And "his" marketmaker would short at the bid.

And the process would continue as long as they can buy the stock back in the market at lower prices at the end of the day profitably.

Now about the long and short position of Valence held by the same investor. If a customer owned Valence stock he certainly could also be short any number of shares of Valence stock....providing that he borrowed the stock to initiate the short weeks ago. Severl weeks ago to add to the selling pressure he could have sold stock from his long position at the bid...or sold short more stock on an uptick.

I have been told that now it is no longer possible to borrow Valence stock for shorting purposes. An investor now cannot short Valence. So the above investor now can no longer short additional Valence stock. His only fire power remaining is to sell his long stock at the bid. Half of his firing power is gone.


But wait....that also means that now someone with a newly acquired position of VLNC common stock can not short additional Valence stock to hedge his new stock position!

And what if a CC is currently not fully hedged? If they cannot short they are open to the same market risks as the rest of us with a major portion of their stock holdings. So ........?

And what if it has been possible to identify the marketmakers that had been aggressively shorting the stock for their own account? Cannot this be reported to the SEC?



Harold









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