jim cramer's take on yesterday's action. i'm not in, but i thought you'd like the lofty perspective.
via thestreet.com, without permissions.
Wrong! Tactics and Strategies: Cramer on the Small-Cap Badlands
By James J. Cramer
5/6/98 8:25 AM ET
At 3:33 p.m. Tuesday a simple headline flashed across my
screen: "Ribozyme Pharma Says Angiozyme Reduces Tumor Growth
in Mice."
"What's the symbol?" I yell to the three traders at Cramer
Berkowitz. "RZYM" comes the chorus; we are all glued to
the same screens, no sense in asking this group what stock
I was talking about.
I punch in RZYM. Five dollar stock. Going to $10, I mutter to
myself. Going to $10 in 10. "Who makes it?" I yell, meaning,
who makes a market in this over-the-counter sudden
sensation.
"Montgomery," came the response from Mark Kantor, my
head trader, after he plugged RZYM into the Nasdaq
machine. Right then, right at that moment, I had to make a
decision. It's not the decision you think. It's not whether to
buy the stock at $6, where it was already offered 25
seconds after I asked for the symbol. It's not whether the
stock will go up; of course it is going up, this is a bull
market. RZYM makes something that works in this
environment -- and I don't mean the anti-cancer drug, who
knows if Angiozyme, or whatever it is called, will ever work?
Ribozyme Pharma makes headlines about cancer drugs,
and that's just good enough in this tape. That's all you need
to double. In the time it took for me to articulate that thought
the stock had vaulted to 7!
No, for professionals like me, who trade for a living, the
decision isn't to buy or not to buy, but do I want to sacrifice
my reputation on Wall Street to make the $10,000 -- give or
take $2,500 -- that I know I can make by hooking
Montgomery on 5,000 shares of a stock because that firm is
unlucky enough to make a market in Ribo at that moment.
And the answer, as always, is "absolutely not."
Ladies and gentlemen, get ready for something
ground-breaking. I am going to open your eyes to a world
you will NEVER EVER see anywhere else other than in
TheStreet.com. I am going to take you on a guided trip
through the badlands, the small-cap over-the-counter
market, as seen through the eyes of someone who will not
play because, frankly, it's just too mean and nasty, even for
me, a grizzled vet of two decades' worth of trading.
Okay, let's back up. I don't know jack about RZYM, other
than that headline. I had never ever heard of it until 3:33 p.m.
Tuesday. I had no idea how many shares it has, whether it
has any sales, any earnings or even any assets for that
matter. I don't even know if it exists. But so what? This is a
game of speed. So, my first question, who makes it, has to
do with which firm I can buy the stock from.
There are only a small handful of market makers who
regularly trade stocks like Ribozyme. Usually it will be a
host of small firms that I have no relation with as well as one
underwriter with whom I do, in this case, Montgomery. I
know from the headline that if I move fast, if I take stock, I
will make money. I know that from ancient stock history:
EntreMed the day before soared 600% on similar news.
If I ask for an offering of Ribo from Montgomery, whose stock
would I be buying? It is a cinch that they don't have any in
inventory. No merchandise is ever available in these fast
movers. Can't stay on the shelves. But Montgomery would
have to honor their market. Those are the rules. They would
have to sell me something if I asked. And then they would
have to go into the open market and "recover" the stock they
sold. And, judging by the velocity of this four-letter comet,
they would have to pay up huge to recover the stock they
sold short to me (it would be short because they did not
have it in inventory).
Oh, I figured I could get them to sell me 5,000 shares on the
wire, heck I am a good enough client that I could ask for
that. Maybe they could sell it to me at 7.125, even though
on the screen it still showed 7, because the screens are
always slow in these situations. Knowing how these stocks
work, even with a little "give" over the offered side, I figured I
could flip the stock at 9 almost instantaneously. I might
make up to 10 gs. In an instant.
But I would never ask them to do this. Because they would
lose $10,000. This trade would be a zero-sum game. I would
basically be taking 10gs out of Montgomery's pocket, as
they would have to go out and pay up for the stock they sold
me. The same 10gs I would make.
Wait, it gets more brutal. OTC traders all have their own
profit-and-loss lines. I would not just be taking 10 gs out of
Mr. Montgomery's pocket; that $10,000 would come right
out of some hapless trader's p&l. And he would have to do it
because I trade too much to say no. No 13th Amendment in
OTC Land. He would be, as we say in our business,
"obliged."
Now I know I have a duty to my partners to make as much
money as possible, so that $10,000 should be made. But,
putting aside any friendships I may have with the other guy
on the line, professional traders live in a world very similar to
those birds that Nikko Tinbergen studied and Edward O.
Wilson writes about: a world of reciprocal altruism, where
animals help other animals because they believe they are all
from the same family.
In other words, because I chose not to rip off the trader, at
some later date when there is far more money on the line,
he will do a better job for me, because I am not a bad guy. In
my business reciprocal altruism, helping others by not
playing the zero-sum game, is the bedrock of what good
professional trading is all about. YOU NEVER EVER WANT
TO BE TABBED AS A BAD GUY. You will get screwed in
the end. That's the code I live by, and, for that matter, I love!
So I made no money yesterday on Ribozyme. And that was
right.
Okay, now let's switch gears. Let's talk about the rapid
Small Order Execution traders, or SOES traders. These are
individuals who trade by computer, not human to human.
They can press a button and "lift" that Montgomery offering
without a problem. They can take 1,000 shares as close to
where the news came out as I can.
But there is a big difference. They do it anonymously. And
they can get away with it. No reciprocal altruism, because
they never need anybody. They just prey on the system.
And as long as it is legal I guess I will defend their right,
although it sure seems silly to me.
Those SOES traders who took stock right when I looked at it
had a pretty darn good trade, because RZYM traded up to
10 and change almost instantly. Did the SOES people know
to flip it? I have no idea. Maybe they thought they had the
next EntreMed. Either way, they had a good trade if they
moved fast enough, but it is not the kind of trade that I can
do and stay in the business at the level with which I am
involved, the level where relationships do matter, the level
where your word still works.
Now how about the Internet guy who sees the news? Can he
make money? First, he puts in a market order, which is the
only way to get a phantom like Ribo. Second, the order goes
to a broker who then does his best to take stock. It is
entirely possible that this whole chain could take seconds,
or minutes. But a market order may mean that you get an
$8 report -- you can't control a market order -- and get it
when the stock has already run to 10, done a U-turn and
then started heading back to 7. I don't think that's worth the
risk. This kind of trade, without more information knowing
that the company has a real prospect in case you have to
hold it overnight, is way too risky. Kind of like a game of
musical chairs where there may be no chairs left if you are
not careful!
Yet, judging from the reams of trades I printed out after the
bell, many, many small players tried this method -- there
was only one trade of more than a couple of thousand
shares, a 5,500 block trade, sandwiched between hundreds
of 1,000-lot trades. Were they successful? Only the most
nimble could have gotten in and out.
Which brings us to the reality of shooting stars like RZYM.
Did anybody really make any big money off this news?
Absolutely, one hour and two minutes before the news,
someone came in and bought 25,000 shares at 5.875, when
the stock was virtually unchanged for the day.
Let's call that guy "Mr. Lucky." Looks like Mr. Lucky lucked
into an unbelievable situation. He could have peeled off 1,000
shares every minute from the time the news broke until the
bell and made $50,000. That's who made the big money on
Ribozyme. And only Mr. Lucky. Everybody else who wants
to play this game gets dealt a far worse hand once the news
is out and the market is fast.
Funny, in all of these small-cap situations I always find there
is a Mr. Lucky out there who showed exquisite timing. And
then there are all the rest of us, virtual cannon fodder for Mr.
Lucky's exit howitzer. That alone is enough to make me
want to stay away from these battlegrounds.
So today is another day and maybe Ribozyme has legs.
Maybe the guys who bought it at the bell up a couple will get
lucky today. Maybe they won't.
Frankly, I am a businessman. I don't want luck to play a
role. I don't want a zero-sum taking of another person's p&l
to play a role. I want my skills to make me money.
Ribozyme is not a skill game. It is a rigged game of chance,
where the only real winner is Mr. Lucky.
I don't play that kind of game.
c 1998 TheStreet.com, All Rights Reserved. |
