Re the wide spread with so little volume, I don't really attribute that to the market maker's motivations, or lack thereof. There's a much simpler explanation without invoking any market maker conspiracy theory.
LIQUIDITY. That's what ETPI doesn't have the keeps the spread so wide apart.
There's a broad range of liquidity in the securities market. At the top end of the spectrum are the megacap companies with hundred of millions of shares outstanding and typical volumes in the range of 2 million shares and higher. These are companies like IBM and MSFT. The bid/asked spread is rarely greater than 1/4 point on a stock price of $40 or more.
Then you get the ordinary big and medium cap stocks that trade on the NYSE, ASE, and upper part of the NASD. Price is usually $5 and higher. Spread rarely more than 1/2 point.
At least 95% of all the volume in a day's markets is represented by the above two categories.
Then you get to the small cap and microcap stocks. These have smaller floats and market values from minimal to $20-50 million. Because of the small floats, the average daily volume also tends to be quite low. AND prices are can be as low as, well, .... pennies.
ETPI, unfortunately, fits into this lowest category. Even though the spread is small in 'absolute' cents, it represents a large percentage of the Bid. This is solely due to low float and low average daily volume (50,000 for ETPI). Face it, we have an illiquid stock here. If you check out other stocks in the same price/volume range, you'll find spreads that are comparable wide. LOW LIQUIDITY.
If you want to claim market maker games, maybe you're right. But if you say the MM doesn't want you to buy the shares, that's not correct. What any MM wants is money in his pockets. That's far better than a stock that won't trade. You will still often see trades between the Bid and the Asked. This represents a limit order where the seller or buyer will not accept the full spread range. Limit orders take longer to execute, but they do get filled because it puts money in the MM's pocket.
Where the games occur is when a seller/buyer is careless enough to put in an unrestricted 'at market' order. That gives the MM license to steal, so to speak. It happens with the illiquid stocks like ETPI. The buyer will pay whatever it takes to get the stock, and he will be taken advantage of. Let the buyer beware -- and always set a limit price.
The experienced buyer/seller will set a limit price between the Bid/Asked spread and will generally get/sell the stock at his price. The risk he assumes is that there may be a flood of orders in his direction and that the spread range may rise (for a buyer) beyond his limit price. Then he has to make the decision to change his limit price, to cancel his order, or just to wait for the range to come back to him. His choice. No MM conspiracy.
In general, I don't buy the MM conspiracy theory to explain large spreads or moves in stock price. I believe it's really a matter of investor supply and demand. But when there's a large number of market orders in any thinly-traded stock, yes, there might be some MM games going on. I don't know where to find the statistics, but it would be illuminating to know how many unfilled orders there are between Bid and Asked at the close of a market day. My intuition tells me there are very few, unless they are for share volumes that are simply not supported by the available supply or demand for the stock.
In the stock market, the simpler explanations are usually the ones that work. |
