DAYTRADING Fundamentals Message Board

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Strategies & Market Trends : DAYTRADING Fundamentals

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To: Wayners who wrote (8982)	6/16/2000 8:11:00 PM
From: OZ	Read Replies (3) of 18137

Personally I think its tape painting and I think it sucks some people in. I always check the bid and ask and if the print isn't possible--I ignore it. Or maybe it is just me in a panic!!!<GG> Once again I do not think it is a form of tape painting, collusion, or any form of deceit. I think it is just a lack of knowledge of the rules (by retail daytraders) that are (and have been) in place under the SEC/NASD. I say this because as many on this thread already know, I am in the final stages of getting all my licenses to become an NASD registered equities trader and am just now myself learning some of these rules. As a matter of fact, I just passed my Series 63 about an hour ago. That only leaves the Series 55 which is actually quite relevant to this discussion. One thing that I learned that pretty much shocked me was as follows. Many of us traders have assumed that the difference between wholesale and retail buying and selling of a stock is the difference between the bid and the ask. That MM's always have made their money by buying at the bid and selling to customers for the ask. This is not 100% correct by any means. Actually the bid and the ask were designed to be interdealer quotations. We quasi retail traders in the last few years gained direct access to the same quotations. Where the big money was and is made is when a MM acting as a PRINCIPAL in the transaction (and not as an AGENT) charges what the NASD call a MARKUP/MARKDOWN on the stock to true retail clients that use MARKET ORDERS. In other words, a market maker gets an order to buy 100 shares of a stock. He then buys the stock at the OFFER (not necessarily the bid) and charges a markup under NASD allowed policies. The spread can be 0 and as long as there are market orders, there is a way to make money available to the MM's for taking the risk as a principal in the trade. The NASD has what it calls the 5% markup policy. It is not firm and is only a guideline that states that a MM acting as a principal can charge a 5% markup on the current offer or buy for a 5% markdown on the current bid when executing a market order. A firm charging more than 5% may or may not be in violation since it is only a guideline. Though their order flow would probably be reduced by the Payment for order Flow Broker since customers would complain if excessive. So if you have a thinly traded stock bid at 100 and offered at 102 and were to put in a market order with a discount broker (not to be confused with SOES market order or any ECN type market order)it is possible that you end up buying the stock for 107. If you then decide to sale it immediately with the same type of market order, then you could end up selling it for 95 for an immediate 11% loss. I was shocked when i first learned this. But the rules are published for all to see. It was never an issue for me because in my Discount broker days because I NEVER USED MARKET ORDERS. Instead I would put in a limit order slightly above the current offer (or below the bid for a sale). Then as Jon said earlier, the MM (wanting more order flow)will just fill the order for a flat or maybe even a slight loss to keep the discount broker happy. So when one sees these "spikes" as DAN called them, it is not someone painting the tape. It is simply MM's following the guidelines established and marking up (or down)customer market orders. Good luck, OZ

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