<< I wouldn't say "stings". Providing LIQUIDITY to the MARKETS is the OBLIGATION of any firm that makes a market in an OTC or NASDAQ stock.>>
Colin, I know for a fact I can differ with you on that one. The only market maker that has any obligation to the stock is the original company that filed the 15(c)211 and NO ONE else. MM's are not obligated to do anything. Market Makers come in two different forms.
1. The Wholeseller- A wholesellers obligation is one of a two fold situation.
A. They will inventory to trade against( this supports your theory in one case, unless they can borrow it or receive it in through selling) If you've ever seen a DTC sheet, everyone of the market makers has at least 1,000 shares, that is not providing liquidity. The theory of Liquidity, Obligation and maintence of a market from the whole sellers stand point is not what we have with DCTC.
B. They do not and they are not Obligated to do anything. Just because they are on the BOX of the company is not reason for them to be obligated to buy stock. Ever. it is illegal to short a designated security, very much so. But, individuals is who that law applies to. You and I cannot swap stock to short, but where they do inventory or LOAN there shares from is 9 times out of 10 the clearing agents. They cannot short stock, legally, in the US from individual accounts. A market maker also doesn't have to trade against inventory, they would rather short the stock in the hopes of the security declining. MM's do not take an EQUITY stance in most cases. If you research the Bulletin Board, you will see the same MM's on DCTC as about 1000 other companies. For them its a matter of math and money that's all.
2. The theory of when a buyers come into a market a MM must fill them from inventory, yes if they have inventory to sell against, and if not they " Short the Stock" A MM knows where there is paper in the system to do so. So to repeat the whole thing, they do NOT have to sell you what they own. If they do not want to. There trading decks are large enough, and yes eventually someone gets hurt. But, Buying creates liquidity NOT MM's. In the end the only one a wholeseller has to be obligated to is him/herself.
The new rules from the NASD on spread tightening, only applies to NASDAQ listed companies.
With so many companies about to be delisted from NASDAQ small cap markets and BB's to the pink sheets, market makers are going to thin or eliminate market making in those securities. Creating " A thin" market. MM's are not required to support thinner markets, if anything they will not even stay around a market that's thin. This is a good thing. Although the problem there is the shareholders of those companies losing money. But that is a Company issue not a MM issue.
3 The Retail MM- Self explainitory but NOT obligated to create liquidity either.
Dean |
