So, lets say that MSFT is bid 100, offered 100 1/8. There are a bunch of bids (mkt makers trying to buy stock) and only a few offers (mkt mekers trying to dump stock). Pretty soon, due to the fact that there are more buyers than sellers (that Econ 1001 still comes in handy sometimes:)) the offer moves to 100 1/4. If a mkt maker is aggressive enough in buying the stock, he moves his bid to 100 1/8. And vice versa--it is akin to a live ongoing auction--people moving their bids and offers according to how much they want to own/sell the stock. How do they make their money? Off the spread. Lets say MSFT is 100 bid, 100 1/8 offer. If the mkt maker bidding for stock can get hit at 100, he could theoretically turn around and offer it at 100 1/8. Sounds easy right? Wrong. The stock he just bot at 100 bid could easily turn down and get bid 99 7/8, offer 100. At that point, the mkt maker can dump it for an eighth loss at 99 7/8, or hold on and hope the position works its way higher again. There is risk, contrary to what the press would make you believe about mkt makers. In a way, SOES trading was a lot like being a mkt maker--you took positions and had to make decisions quickly.
I think I understand your question re: bulletin board stocks. Not all bulletin board stocks are bad, but you do need to be careful. The BB is the source of where a lot of the well-publicized bucket shops have plied their trades. That's not to say all bulletin board stocks are bad, just some of them. What a penny stock firm can do is take a stock with a really low float--lets say there are only 1 million shares in the float. The bucket shop bids up and buys all the stock available in a thinly traded stock, and puts it into their inventory. Lets say, by doing this, they accumulate the stock at an avg cost of $1 a share. And by buying all the stock available, they have artificially run the stock up to say $2. They then got their brokers to sell the stock to clients at $2 a share--selling them the stock out of their inventory that they own at $1. After the brokers are done selling the stock out of inventory, and the firm stops accumulating the position, the stock eventually fades back to its "regular" price of $1, since the buying pressure is off. That was how the big penny stock firms made all of their money in the 70's and '80s (remember the guy coming in on the helicopter from New Jersey saying, "we're buying America"? in the TV commercials in the 80's?). This practice still happens occasionally, but is pretty rare now, due to the fact that most of the bucket shops have been run out of business in the last 5 years. The bucket shops choose the bulletin board stocks, since they typically have fewer market makers than a stock listed on the NASDAQ. Less mkt makers=easier to manipulate. With the advent of computers, it is much easier for NASDAQ to regulate and police their activities, as opposed to the 70s and 80s when such technology wasn't readily available.
I hope that answered your questions. Oh yeah, an "SRO" is an acronym for "self regulatory organization," which is what the NASD is. The NASD is an organization, set up and financed by the brokerage firms, to police itself.
Hope I answered your questions okay,
Gary |
