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Technology Stocks : RGFX Raster Graphics

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To: Sam Citron who wrote (155)	8/8/1997 7:00:00 PM
From: Raymond J. Ashe, Jr.	of 593

SAM Sam the market making business is a lot more complex and secretive than most people imagine. First off, to answer one of your questions--I have worked in the securities business for the past 7 years at an independent broker dealer in the wire order area (the area where orders from retail are transfered to either market makers or the appropriate exchange for execution, I also have a small group of retail clients who I trade for). Secondly in a stock such as this which really is a thin issue with relatively little liquidity I would be suprised if any MM have much inventory on hand. I suspect most of the activity is just the filling of retail orders on a demand basis. As I mentioned before there are alternative trading venues such as instinet and selectnet that are used mainly by broker dealers and institutions to display bids and offers that are inside the spread (or sometimes outside the spread in the case of orders ahead of the market that they don't want to babysit). If the MM have little or no inventory and you place an order to buy 1000 shares at 7.125 net and the quoted market is 6.75-7.125 this is the scenario that most likely would occur (in my experince). It is most likely the broker would give the market maker a buy ticket at the 7.00 level--the market maker would then search the alternative trading venues (instinet/selectnet/other systems) to see if he could possibly buy the stock at 6.875 or better at the same time he joined the bid on NAsDAQ(the market the public views on quote machines) at 6.75, A seller of the stock would probably be happy to get 6.875 so its possible he might find some at that level--if none is available or he pefers he may execute the trade anyway and be short in his account hoping to cover that position sometime in the future at a profit--in that case he may stay at the bid at 6.75 or perhaps raise the bid to 6.875--he might also put a bid in the alternative systems at 6.875 which cant be seen by the public. What I'm striving to convey is that very little of what is traded is actually at the bid or the offer.(the stock is bought some place inside the spread and "printed" on the tape at the bid or offer) Now remmember the trades in this stock are relatively small hundreds and thousand share blocks so the trader making an eight from 6.875-to-7.00 the price he sells it to the retail broker(your represenative) is his commission which he splits with his firm so he probably making gross 60.00 bucks--the broker delivers the stock to the client at 7.125 so he has an eight which he splits with the firm so he keeps maybe 45.00 after ticket expenses (the clearing cost). This is probably very confusing, I'm sorry--but to answer another of your questions you do not have to accept the bid when you sell if you can get your broker to work your stock at say 6.9375 he should be able to net you the bid at 6.75 and still have enough to pay himself and the trader has room to make a small profit. Now i realize that not all firms or brokers do business in this fashion so it may not apply to the firms you deal with. And it certainly would not apply to any of the web traders or deep discount firms because they keep all the spread they shave (that is there profit center-since they make virtually nothing off the commissions they charge(but thats a whole other story CALLED ORDER FLOW). Hope you gained some insight from this and of course the more active stocks trade tighter because there is more competition for the stock-also market conditions greatly effect your odds of getting filled, falling markets are the buyers friend and a rising market is the sellers ally-I'd better quit here before i write a book. Ray Ashe

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