The market maker system is run like a racket. There is another Forbes article that goes into the specifics of NASDAQ and manipulation by the market maker. I can get this reference if you want.
There is also at times manipulation even by the specialist on the NYSE on thinly traded stocks like some preferred issues. Both my father, who introduced me to stocks over 20 years ago, and I have witnessed this through his trades in these issues. We even saw a specialist crossing the price of his sell limit order without exersizing the sale of his stock and also taking only 200 shares at a time leaving him with most of his 5,000 shares. As soon as he implements an "all or nothing" order, the specialist picks up the rest of his block of stock for sale. This has happened too many times to be just by chance. My father would also set a bid price for stock significanlty ahead of the current ask price and *no* shares would transact. The specialist would then just up the price over what my father put in as a bid. So much for firm quotes. There are trading practices that can work against this type of practice by the marketmaker. But it still is a game.. For example, in some cases related to the sale of a large block of shares, it is a good idea to break up the block into multiple sell limit orders. For large block purchases, its equivalent would be to place in a buy limit order for a smaller block of shares at a time. Both practices allows the investor to be less visible to the specialist. Through intelligently placed multiple trades, you can purchase the stock close to the price you were looking for.
However, from what I have read and some of what I have seen so far, NASDAQ makes the exchanges look like a picnic as 100% above board operations compared with the machinations that the market maker on NASDAQ provides the investor.
Do not forget the questionable practices by the broker. Brokers are allowed to cross trades and also maintain an internal trading desk on stocks. The broker also invests in stock and many are also dealers in particular issues. Then there is the kickbacks brokers receive from their "freindly" marketmaker. All of this increases the likelihood of poor executions of orders which are performed to the advantage of the broker instead of their customer. One way around this is by insisting to the broker that no "third market" can be used for the trade, and if the block of shares is large enough, to use SelectNet, or if not, submit the order to multiple market makers. This is particularily important if the broker is also the marketmaker in the stock. SelectNet also has the advantage of much smaller spreads than the "outside" NASDAQ market. Better yet, try to find a broker that is tied into the SelectNet system who can show you the current bid/asking prices made on the stock by investors (not the market makers). In this way you can more intelligently place your bid price and your asking price for stock . Also always use buy limit and sell limit orders on NASDAQ. Never purchase at market particularily in relatively thinly traded stock.
I have also seen brokers push stock onto their customers. In many cases, the stock is of a company that is *moving into* alot of financial problems and would be something an investor would want to sell instead of purchase. I believe brokerage houses like MLP have "hit" lists of stock that they have to unload. What a better way to unload large block of stocks in a way that does not show up in the NASDAQ marketplace which would affect the current bid prices of the stock. If they were to unload it through NASDAQ, the large volume itself would push the price of the stock temporarily down for the sale, and MLP would also have to pay the spread on the stock unless they are also the marketmaker in the stock. After all, the brokerages can claim that they are executing the sale at the current market price. I object to the questionable practices they use to rid themselves of undesirable stock. Because of this, I would not listen to recommendations from your broker, or at least do the research yourself on the stock being recommended to you.
Anyone else with interesting experiences with NASDAQ and the exchanges? |
