Amein,
If MM's are making profitable trades, the end result would not be increased volatility. The end result would be a less volatile market! In order for a MM to make a profit he/she must buy low and sell high. When an MM buys a stock, the demand increases - which puts upward pressure on the price. If the MM buys when the price is low, e.g., at a trough, the MM is shoring up the price when it is most needed.
By the same token when the MM sells his stock, supply increases - which puts downward pressure on the price. If the MM sells when the price is high, e.g., at its peak, the end result is a lower price, which is stabilizing. Thanks to the MM, the stock is being supplied to the market when it is most needed for price stability. Stock prices inevitably are going to fluctuate, but successful (profitable) MMs unwittingly perform a useful social role by helping to dampen the peaks and valleys. The end result is less volatile, more stable market.
If you doubt this, let me offer you a challenge. Construct an example in which the MM makes money, and at the same time destabilizes the market. A successful example must meet the following condition. The MM must end up with no net change in the number of shares owned. For example, you cannot posit that the MM buys shares at the peak, driving the price even higher, but doesn't ever sell. I would grant you that would be destabilizing. But as Chuz pointed out in his post, an MM would gain nothing by driving the price higher if there were no one to sell to. Whatever shares the MM acquires, he must at some point liquidate if we are to conclude the trade was profitable.
Regards,
Geoff |
