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Strategies & Market Trends : A.I.M Users Group Bulletin Board

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To: Saul Seinberg who wrote (9949)	1/11/2000 5:08:00 PM
From: OldAIMGuy	Read Replies (3) of 18928

Hi Saul, First I should say that this is how I THINK it works - which may have absolutely nothing to do with the TRUTH!! :-) Let's assume that our favorite stock WXYZ has been trading in a range from $10 to $15 for some time. Because we're good AIMers, we have put in some Good 'Til Cancelled, Limit orders to see if we can catch some of this range and convert it to profits. AIM happens to currently be telling us to Sell 5% of our holding at $14-3/4 and to buy an additional 5% if the price falls to $10-1/2. So, we call up our favorite broker and ask them to place our minimum orders at those prices. Let's assume the price is dropping and the current Bid is $10-1/2 and the Ask is $10-5/8. Chances are we aren't going to get our trade. Why? Because the current Sellers want to receive $10-5/8 and we're only willing to pay $10-1/2. Trades may continue to go on at $10-5/8 for some time as supply and demand at that price equalize and all potential trades are filled. However we have to realize that the Buyers are probably paying $10-3/4 while the sellers are getting $10-5/8. Only when someone is willing to sell some shares at about $10-3/8 is that buy order going to fill at $10-1/2. The market wants its $1/8 and isn't going to do this stuff for free. On the Sell side, we have to wait for someone who wants to buy our shares and is willing to pay the "spread" above $14-3/4. If someone wants to pay $14-7/8 for our shares, the market will make the trade, take its cut and pay us $14-3/4 for our patience. Again it's going to take parties on each side of the Bid/Ask range to get the job done. This is why it's very difficult to actually get a trade done at the day's high or low. However, it does happen. Let's say the market maker is anxious to get the day started with a nice high price trade. He usually has "inventory" of his own in the stocks with which he specializes. Yesterday WXYZ closed with a trade of $14-5/8 at the high for the day. He wants to see the stock get a good start today, so he fills the first 100 share order on his desk at $14-3/4 just to get the bidding going. As the day passes that trade could end up being the high for the day if the market was sour all day. The same thing can happen on the buy side and does once in a while. I find it happens to me usually when one of my orders has been on file for a very long time. I hope this helps a bit to explain how this all works. I also hope that I'm not just spreading a poor description of what really happens! Anyway, it's how I've decided it SHOULD be! Best regards, Tom

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