In what I had in mind for an answer to my question, your comment about institutions (big money) wa close to the mark. And yes, I did mean rapid moves that can lead to much more substantial moves of price.
The distinction that I had in mind was that of the underfunded trader. Traders, and on the listed exchanges, particularily the floor traders, have a substantial impact on the short term direction of the market. These traders are basically made up of brokerages that are handling customer mone, and money on their own account, large traders including the arbs, and the small trader. Now evidently, it is this descrepency in terms of money between the large traders and the small traders that cause many of he price breaks that we see in the market.
The problem is where the small trader can only sustain a relatively small change in the instrument they are trading, like stock or the S&P futures. So when the price moves more than their relatively small tolerance, they have to get out, and I mean get out *now*. Otherwise, they will not be there to play the game for the next trade. So for instance, when the actively traded stock moves out of a range, theprice begins to move with velocity. So the small local on the floor can influence the swing in price, but cannot aford to get in front of a price swing that is not going their way. They will lose out every time. The larger money can handle a larger price swing before this happens. So they do not need to rush to push their sell order through as much as the smaller less financed trader does. And the smaller trader does reperesent a significant part of the trading that goes no the floor.
But then, the large money, like the brokerage houses and trading firms, have comparatively very large amounts of money to work with. Matter of fact, they are in he position to start intraday price swings that can lead to major intraday price movements. Furthermore, they can actually stand in front of the moving train of a price swing that is fueled by the small trader, and stop it dead in its tracks, and reverse the market. This is where, like you said, the institutional money can squelch the supply. The smart smaller trader keeps an eye on what the commercials are doing. They never want to be on the wrong side of a trade with the commercials. And good tape reading skills can help an off-the-floor trader determine if a price move is becuase of these comparttively underfinanced traders, or because of the commecials entering the market with their very large orders.
As you have mentioned, there are also the short sellers. These traders definitely help to exaggerate a move up by the market. In their "fear", they can add allot of fuel to the market move by bidding the price up. They need to find a seller. In a quickly upward moving market, there is a scarcity of sellers. The seller demands constantly higher prices before they are willing to sell. So the trader in a short position, particularily a small underfinanced trader, will bid that stock up mptivated by their iimmediate need to cover their short position.
I have read where if the floor traders know there is another trader desparate in this short covering situation, the other floor traders will even more enthusiastically bid the price up to cost the shorter extra $$ to cover themselves, and put a few extra $$ in their own pockets. What also happens is that when a trader who has already made a position in a stock or future, they will help the bidding process to fuel the price on its move up. In a heated bidding situation, this does not require much money. The trader just needs to bid a token amount in front of the previous bid in order for others to bid higher for that same stock. Some traders i the future pit will even bid fictitously large amounts in order to put some additional heat on this bidding process. they do not expect to have to meet the obligation of their bid becuase they expect someone else to be their immedialtey bidding higher. But this is a tricky approach, since they will have to make good on any bid that another trader takes them up on. This type of situation happens alot in the S&P futures pit. I imagine this also can happen allot on the stock exchange floor.
There is also an equivalent to the causes of price breaks in the NASDAQ marketplace.
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Bob Graham |
