The following is one of the best posts ive ever read on SI. I dont agree with everything
in it, but for everyone who wants to understand MMs and what they do ... READ
exchange2000.com
To understand the recent price action on ALYA, you must understand how Market
Makers work.
Here on SI, we blame market makers for everything we don't like that happens in a
stock. This is foolish. If there were no Market Makers, there would be no market. The
next time you get suckered into something and have to dump when it heads south, make
sure you inwardly thank the market maker who took it off your hands, because it's
probably worth even less than you got for it.
The way MM's provide the liquidity that is ESSENTIAL for the market to work is by
naked shorting. When your bid is filled, the MM does not necessarily have the stock.
However, when a major retail brokerage calls an MM asking for something, they must
provide a fill. Otherwise, the retail brokerage will stop calling and the MM's business
will dry up.
In a way this is good for you. In a stock like ALYA, where the free trading float is
already oversubscribed, you'd probably have to pay over $2.00 to get in already if the
MM's were not providing additional liquidity by essentially minting shares.
This is not the same as dilution, which is permanent. Since most BB stocks are basically
worthless (but not this one!!!), MM's figure they can always cover their short and cancel
the extra float when the momo dies down.
However, when there is a sustained upward movement in a stock, the MM's get
nervous. If it goes on, it means the MM's will have to cover their position in the regular
way, and at a loss. And the loss could be substantial. How many bid/asked spreads
does an MM have to scalp to cover one $.50 misjudgment?
Some of the MM's in ALYA are nervous right now. An MM short position against the
stock has been building all week. Over the last couple of days, major real world interest
has been coming into ALYA. MM's have cavalierly filled the orders, thinking they'd
always get a chance to cover around a dollar or below.
That chance hasn't come, and it won't. So now, to trim their losses, MM's are playing
games trying to jack up prices when buying interest is strong, and then lowering them
when demand dies down. First the bid falls, and stockholders get nervous. Eventually,
the MM's feel strong enough to take down the asked as well, because nobody is buying
the stock. Then they lower the bid some more. If they can get you rattled, they can pick
up some low-priced shares to sell when the demand is stronger. Not a bad business --
buy at $1.26 at the close, sell at $1.40 at the open the next day.
MM's are like you -- they want to maximize their profits. Like you, they want to make
more than what they can scalp off the bid/asked spread. Here in PennyLand, the big
pops that the players all think they want give them ample opportunity to sell at the top
and buy at the bottom.
That's why we have emphasized a buy and hold strategy on ALYA from the start. This
company is not Instant Nothing, so you don't have to play into the hands of the MM's
by trying to get your profits in an instant.
Real world news and buying will break the squeeze on ALYA. It's not up to you --
investors are coming in from elsewhere. All you have to do is hold. Or, as my friend
Klaw has reminded us so many times, add to your position on dips. When you see the
ask lying there at a level that makes you uncomfortable, if you have some cash, pick up
another 1000 shares -- and hold them, too, for a good long while.
Everybody wants to know how they did it on DGIV. Well, this is how they did it. All
you need is a real company with real products, real prospects, real news and real
investors, and success is sure. ALYA's float is much smaller than Digitcom's. 'Nuff said |
