DD, before you go, you may want to read the following passages my wife found on another thread, that in turn was found on some other thread.
Good reading, but better for studying and thoroughly understanding.
Let's call it: CONFESSIONS OF A MARKET MAKER
Folks, read this, from the horse's mouth!
I got this from one of our sister planets, and edited out the parts
that are not relevant. Call it "true confessions of a reformed Market
Maker." It will reinforce everything we have been saying for
months now about the MM activities. It has nothing to do with
DGIV, but note that this reformed MM has not become an
INVESTOR and he looks for company FUNDAMENTALS.
Since we have those fundamentals, we need not worry about any of
this. I know that the old timers know this, but I am pasting it for the
sake of our new passengers.
<<Market Maker
cardshark_1999
May 28 1998
1:28PM EDT
First let me say that I am a shareholder with purchases between
$1.66 and $2.18. This is my first post on this
board though I have been monitoring it for about a week.
I was a OTC MM for about 10 years ending in the late 80's. Since
then I have been strictly an investor. Since
I have not been that up to date in MM rules I will only make
statements that I feel fairly confident are still
accurate regarding these activities.
I purchased my first TGSK a couple of weeks ago even before I
knew of this Boards existance. I did it based
stricly on the earnings announcement and press releases put out by
the Company. In other words on
fundementals. I will continue purchasing it for this reason.
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 whats know 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 preformed (his life blood). This will go on
until he "fails" to perform and so on.
Contrary to popular opinion the "Big" firms Do NOT neccessarly
go to the "Low Offer" to fill a buy order (Or
high bid for a sell). The "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 wholsaler 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, ergo "Big" firms.
With the above groundwork layed, 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 quitely 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 fill 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 loose 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 50 or 100 shares
(depending how big his bank is). Finally the market closes for the
day and on paper he may look allright 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
spead" 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 particulary 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. >>
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