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Non-Tech : Market Makers; What They Do vs What We Want
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To: Iceberg who wrote (2)4/19/1997 12:48:00 PM
From: Doug R   of 207
 
Ice,

Market makers are the middlemen. Their involvement in a stock begins
at the IPO level. They are the brokerage firms that a company contacts
to use as clearing houses for their newly issued stock. The brokers
are paid a fee to handle the IPO and work out a share price to start the
stock at based on the company's value and perceived demand for the stock.
At this point the brokerages involved are known as the underwriters of the
stock. Once the shares are on the market any involved broker is an mm.
They set the bid and ask based on supply and demand. The bid is what
they pay you when you sell a stock. Now they own it and need to sell it.
If they find no buyers they have to drop the ask. If there are more buy orders
than shares available they will raise the ask, which may lower demand,
while raising the bid to find people willing to sell at a higher price
so they can accomodate the buyers. The spread is for their protection.

One day a small co., FONR won a $100,000,000 law suit against GE. The
stock went from 2 1/4 to 3 on big volume the day before the announcement.
The mm's got the "brilliant" idea to open the stock at 4 5/16 the next
day. After 5 or 10 minutes of initial buying the ask got to 4 1/2.
Then everybody and their mothers started selling the stock. It had
been a very long time since anyone had seen the price over 3. Now
the mm's were buyig the stock from sellers faster than they could find
investors to take it off their hands. The bid dropped like a rock to try
to slow the wave of selling. The mm's must have taken a real bath
that day and the next. 4.9 million volume on the first day, 1.2 million on the
second. The stock was all the way back to 2 27/32. Before that the
stock avgd. about 120K of volume. It still does now. The mm's
miscalculated that one.

Doug R
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