Here's an interesting post on MMs that I copied from another thread:
Must Read: MM for BB stock
(http://www.ragingbull.com/mboard/boards.cgi?read=47034&board=TSIG)
TO ALL TSIG SHAREHOLDERS: This is the reason why the MM's would not let the
price go up:
Market Maker Speaks Out:Ways of a Market Maker :
I was an 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 a 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 what's known 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 that MM who performed (his life blood). This
will go on until he "fails" to perform and so on.
Contrary to popular opinion the "Big" firms Do NOT neccessarily 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.
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 quietly 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 fills 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 lose 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 all right 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 spread" 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 the 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 particularly 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." _____________________________________
Credit for this post goes to Cardshark_1999
|
