<Do you play pennies?>
Almost never but here are points from the
other side...
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." |
