Market Maker/Cardshark. (cribbed from SI/$5 and Under 5/28/98)
Message 4630615
>First let me say that I am a shareholder [TGSK] 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. I rarely buy stocks that are not reporting
since I do spend a lot of time researching the Edgar filings.
However since this was a recent RTO I have relied on the
Company's statements to date. I understand the 10K has been
filed and look forward to seeing it. But frankly, due to the
fact that I don't think the President wants to go to jail based
on his very positive PR's I will take him at his word at this
time that this is a very undervalued Company.
I guess the primary thing that has me confused is why he left so
many shares out with the public when he rolled up his very real
Company. But I am willing to surrender this thought to his lack
of knowledge of how to do an RTO. And the fact that some
promoter "put the pants" on him. If he knew what he was doing he
probably could have ended up with over 95% of a fully reporting
shell. I don't mention this as a negative regarding his ability
to run and grow a very successful Company in an Industry that he
obviously knows well. The positive side of this point is that he
certainly has given an opportunity for astute investors to
participate cheaply in his many years of hard labor. For this I
thank him.
Regarding the alleged "short position". I am not going to get
caught up in the discussion as to wether there is or is not a
significant short here though I have to admit It is very
abnormal for a stock with only a few million share float to
trade the type of volume it has been trading for the last few
weeks. What I would like to say is certain opinions I have
putting on my MM hat as to why (if there is) a short may have
materialized.
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.
Pistol Pete<
--------------------------
Under the heading of "Sympathy for the Devil", I once read a book about short-selling called "When Stocks Crash Nicely" (can't remember author/publisher.) and I thought *that* was scary.
soup |
