DAYTRADING Fundamentals Message Board

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Strategies & Market Trends : DAYTRADING Fundamentals

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To: OZ who wrote (8984)	6/17/2000 10:42:00 AM
From: Robert Graham	Read Replies (3) of 18137

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. From what follows in your post, you imply that the MM will act as principal on an order from a small retail account, which is the norm. How would this be in the MMs (or more particularly) the retail accounts best interest? From what I understand, MMs act as principal on large distribution or accumulation orders which frequently have been negotiated ahead of time. This is where their efforts can be rewarded in the most effective way when they operate in "bulk" in this fashion. And in that very competative end of the business, I am sure that the market up or market down will be made as small as required to meet the competative pressures of the business. Matter of fact, if the MM cannot perform for the large account by offering the best available cost for their service, the large account will simply go to another MM. In the past, this perhaps was not the case with the large accounts proving to be more loyal to a particular MM. But this area of the business from what I understand has become extremely competative and has made the switching between MMs much more common. In the end, an efficient market generated by this competative maneuvering by the large retail account should provide for the least cost for the large retail account and also provide for similar costs between different MMs. Of course this assumes no collusion between the MMs for the competative effects of switching to be worthwhile. I do agree those "spikes" that can be periodically seen on the tape is the result of the markup or markdown procedure on large orders after the order has been worked and now the MM needs to balance their book work by printing the transfer of funds between the MMs account and the retail account they were servicing. But it is interesting how at times these "spikes" in the stock can influence the future price of that stock that is traded by eager traders who want to see the stock go up. Even though the rules which permit markups and markdowns do exist, their actual effect on the price of the stock depends on the market and also how this part of the business is handled by the MMs. Feedback is welcome! :-) Bob Graham

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