Ed and all:
Very interesting worth reading.... I am going to try to find the short interest in WCTI!
Buying panic hits Internet stocksNasdaq turned on its head, insignificant stocks surge as too many buyers chase too few shares OPINION
By Christopher Byron
MSNBC CONTRIBUTORDec. 10 — Lest anyone doubt that strange things are
happening on Wall Street these days, Tuesday provided some of the most
convincing evidence yet: a 73 percent one-day price explosion for an
obscure NASDAQ small-cap stock that commended itself to investors by
issuing a press release denying its involvement with hustlers and insisting
that it really did intend to launch a web-site any day now.
UPON THAT CLAIM and nothing else, Miami-based Tel-Com Wireless Cable
TV — a company with few assets, no profits, and total revenues of barely
$1.5 million a year — tacked on another $288 million in market value and,
by day's end, was worth roughly $680 million on Wall Street.
This sort of thing would be laughable, except that it's no joke. The
buying panic in Internet stocks has now reached such proportions as to be
undermining the ability of the Nasdaq stock pricing mechanism to function
at all.
Even many of the beneficiaries seem alarmed. One such individual -
the CEO of an over-the-counter Internet stock so small and inconsequential
as to be exempt from filing financial statements with the Securities &
Exchange Commission (Pinkmonkey.com) - expressed his bewilderment to the
Wall Street Journal on Tuesday. Speaking of investors who had driven his
stock up nearly 800 percent in two days the previous week, to touch $10 per
share for a brief moment on Dec. 1st - Pat Greene said they were engaged in
“absolute nuttiness,” adding in reference to his stock's price, “If it was
my money I wouldn't pay that high for it.”
So-called Nasdaq market-makers have come in for plenty of deserved
criticism in recent years - most particularly for the repeated
price-gouging of their own customers through unjustifiably wide spreads
between bid and ask quotes on Nasdaq stock screens. But for all their
shortcomings, they remain the heart of the Nasdaq pricing system, and when
it comes to the Internet sector, they are being given the mauling of a
lifetime by a combined onslaught of day traders and momentum hedge fund
operators.
There is a fierce debate now raging among Wall Street insiders as to
whether the distortions in the Internet sector are being caused by the “Big
Mo's” (momentum hedge fund traders), or the “Little Mo's” (individual day
traders.) But everyone agrees that both are playing a role, which is
ultimately, all that really matters. Caught in the middle are the market
makers. The buying panic in Internet stocks has now reached such
proportions as to be undermining the ability of the Nasdaq stock pricing
mechanism to function at all.
Unlike the New York Stock Exchange, Nasdaq has no specialist system
but instead uses dozens of independent “market makers,” all posting
buy-and-sell orders electronically before the public. When buyers turn up
wanting to buy more stock than the market maker possesses, he is compelled
to sell stock he doesn't actually own in order to meet demand. In effect,
he “sells short.”
In a normal market, the market maker can then turn around and
“cover” his “naked short” position by either buying or borrowing stock from
somewhere else, which he is required to deliver to the buyer's broker
within three days. The problem comes when the market maker can't find a
“borrow.”
When a stock is thinly traded and there is great buy-side demand, a
scarcity develops in the market and market-makers wind up developing huge
short positions that they can only cover by bidding up the price of the
stocks in question high enough to induce holders of the shares to sell.
This process is greatly intensified when large numbers of buyers
converge simultaneously on market-makers, looking to buy — which is what
has been happening with Internet stocks this autumn.
A large number of day-trading chat rooms and web-sites are now
actively tracking all manner of Internet stocks, looking for (and trying to
anticipate) any upward momentum in the price. When they see signs of it,
they pile on and begin buying, which causes share prices to surge out of
control. The market makers try to cover their own short sales and this
simply forces the price higher and higher.
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This is what happened in September with Amazon.com, which rose 72
percent during the month. Close to 10 percent of the stock's total volume
that month was accounted for by one small and obscure day-trading firm,
Broadway Trading LLC, in New York. The day traders will tell you they made
a fortune on the stock that month. The hedge fund operators will tell you
they were just “picking up dimes in front of bulldozers.” The real losers
were the market makers who provided the liquidity.
This excessively lopsided buying frenzy means that roughly 20
Internet stocks - among them eBay, Amazon.com, Go2Net, Telcom Wireless
Cable TV, and Onsale - are currently categorized by Nasdaq as “UPC 11830”
stocks, meaning that they are barred from being sold short by retail
investors because it is impossible to find borrowable stock in the market
to cover the short positions. The list changes daily. But if buyers still
want to buy them - which they obviously do — and market-makers are willing
to quote prices for them when they don't actually own the shares, even
these UPC-11830 shares wind up getting shorted - not by the day traders
but, once again, the market makers.
Internet phantom stocksThese 19 companies are listed by Nasdaq as unable to
be borrowed and sold short by investors because there is no market
liquidity left in the stocks.
In fact, reports have lately begun to circulate that even retail
traders are now adding to the short-pressure. Believing the Internet sector
has finally topped out, a small but growing number have started shorting
stocks in the sector themselves. Since liquidity is so tight in a number of
the stocks being shorted that they are almost impossible to borrow, the
traders are “going naked.”
While illegal under Nasdaq rules, some day trading firms are said to
be allowing their clients to do so anyway if they agree to close out their
positions each day. The risks, of course, are enormous, because if the
stocks involved actually rise instead of fall, the day traders wind up
finding themselves in exactly the situation of the market makers, having to
chase stocks higher and higher to cover their positions.
Consider the situation that developed Tuesday regarding the
aforementioned Tel-com Wireless Cable TV.
TCTV's share price had heated up in the previous week over
speculation that the company would launch an Internet site. But then came a
negative story in Barrons, questioning the company's possible involvement
with a group of apparent stock promoters. Then, when management put out a
press release denying the charge and reiterating plans for an Internet
site, a tremendous surge of buying orders hit the stock at the opening
bell. “It was like a tidal wave,” said one market-maker in the shares.
This spike set the tone for a day-long surge of buying by day
traders and offsetting short-covering by market-makers. The buying and
short-covering came almost hourly in waves: at 9:30 a.m., 10:30 a.m., noon,
and then twice more after lunch. By the closing bell, Tel-Com Wireless
Cable was up an incredible 73 percent on the day, for no justifiable
economic reason whatsoever.
How much longer this situation will continue is anybody's guess. But
a massive collision has occurred in the American stock market, between the
forces of a technology-driven buying frenzy on the one hand and the
mechanics of pricing stability on the other. The sparks being thrown off
are lighting Wall Street in ways rarely if ever seen. It is, in a word, a
time to remember. |
