siliconinvestor.com
To: Essam Hamza (749 )
From: DrMedina1 Wednesday, Jun 10 1998 6:32PM ET
Reply # of 1913
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.
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