Hi Amein,
Back from a cruise that started from Florida went to Mexico and then to Central America. Meet some wonderful people and enjoyed spending some quality time with my wife and friends.
Your last post to me pinpoints the number the MM needs is 55 in order to make the gamble pay off. So lets go with that and see where it brings us: To review your example:
The Market Maker owns 40M shares of a stock, currently trading @70.00.
MM sells 5M @70.00.
MM has 35.M to play with. The market is @ 70. MM offers and sells 5M @ 69.
MM has 30M to play with. The Market is @ 69. MM offers and sells 5m @68.
MM now has 25M to play with. The Market is @ 68. MM offers and sells 5M @67.
MM now has 20M to play with. The Market is @ 67. MM offers and sells 5M @ 66.
MM now has 15 M to play with. The Market is @ 66. MM offers and sells 5M @65.
Now the Market Maker goes to the sidelines. It has accomplished its purpose. The Public, following the momentum created by the MM drives the price down to 55.00. The MM now jumps in and buys the stock.
Let us say that we presented a reasonable example of how that could be done. We showed a normal give and take of trading with no determination of winning or losing (the public evenly exchanging 10 million shares in each and every case). We show how in a series of 5M shares provided by the MM at a deliberate bargain price how the price would incrementally be brought down to 65.
You show in your original example the MM expending 30M. The public exchanging 60M and an implied buy of the 30 M which was sold by the MM. This then was the scenario which brought us from the original 70 price to the 65 per share price.
From that point the public plays amongst itself and brings the stock down to 55. In order to adhere to your model and to provide the average share price buyback of 57.50 as preconditioned by you in your hypothesis and to keep the example in balance, we will use the "Public Panic Sell" to substitute for the "MM Deliberate Sell" to continue using the same proportional ratio of buys and sells to show how this could be further driven down from 65 to 55.
Of course we are asking a lot here. But to provide the example of the Market Maker being in a position to step aside and then to come back in at 55 as suggested by you as the point where the MM gamble would pay off, we will assume that this gamble paid off to the extent that 55 was attainable and in a manner that is in keeping with the example originally provided.
To be consistent that would look something like this.
@65 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@64 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@63 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@62 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@61 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@60 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@59 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@58 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@57 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@56 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
@55 a " panic sell of 5M" a public play of 10 M(even exchange) and an implied buy of 5M = 20 M.
At this point the MM jumps in and buys back 30 M shares at the same rate it took to bring the stock from 70 to 65.
MM buys 5M shares @ 55 a public play of 10 M ( even exchange ) and an implied panic sale of 5M = 20 M.
MM buys 5M shares @ 56 a public play of 10 M ( even exchange ) and an implied panic sale of 5M = 20 M.
MM buys 5M shares @ 57 a public play of 10 M ( even exchange ) and an implied panic sale of 5M = 20 M.
MM buys 5M shares @ 58 a public play of 10 M ( even exchange ) and an implied panic sale of 5M = 20 M.
MM buys 5M shares @ 59 a public play of 10 M ( even exchange ) and an implied panic sale of 5M = 20 M.
MM buys 5M shares @ 60 a public play of 10 M ( even exchange ) and an implied panic sale of 5M = 20 M.
At this point the MM expended a total of 30 M shares to depress the price from 70 to 65. Jumps in at 55 and buys back 30 M shares in the same fashion as it was expended. The average purchase price was $57.50 x 30 M =1725M. At the time the MM stepped aside after spending 125 million dollars to drive the price down from 70 to 65 with the expectation of the public carrying it further down, the MM had 2025M in cash and 10M shares of stock which at the time was worth 650m for a total worth of 2675M. That was his position when the stock was at 65.
Now the stock is at 55. The MM spends 1725M to buy 30 M more shares. This leaves the MM with 2025M less 1725M = 300 million in cash and 40M shares worth 2400M plus 300 M in cash = 2700 M.
Under that generous and highly unlikely scenario the MM, even if successfully inducing the public to carry the price downwards from the manipulated price of 65 to 55, would only recover 25 million of the original 125 million that was lost (to get the price down from 75 to 65)!
Note, that in order to do this the MM had to wait until the price went from 65 to 55. Using the same rate and buy sell ratios as "exampled" by you in the original model, 220 million shares had to be exchanged before that 55 price was reached all without any MM shares being used!
It is highly unlikely that, given the original 125 million dollar original loss incurred under the original model, you and I could come up with a rational way that the MM could make that money up, in any reasonable short period of time, much less earn on that sort of play!
Having said all of that, I find your willingness to entertain the possibilities admirable. You did indeed present a good attempt to show how it would be possible for manipulation to take place. You even took what I thought was an indefensible position and provided a thoughtful counter point of view. I am sure that given a different scenario that MM or anyone with enough of a bankroll could create or take advantage of bad or losing play.
The scenario ( part two ) where the MM and others taking advantage of losing or dumb money is to my way of thinking a more likely occurrence.
We would be better served to explore ways in which the MM would act as smart money. That is, money that would most likely win. In other words, using the idea that for every losing sale there is a winning buy and VV. In that exchange, there is a likelihood that some of that action is better then the other. Some of the action can be difficult to pinpoint and can be obscured, other types are easier to identify.
I would categorize panic selling as losing money and those that bought those shares, as winning or smart money. I would also categorize selling a stock "below the market price" as a losing sale and buying "below the market price" a winning buy.
Now if the MM could take advantage of such losing money without paying a price(125 M to do so) then they can compete on even footing with others, hopefully like those on this thread and elsewhere who would be in a position to buy when such situations present themselves.
Amein, I believe we are on the right track when we say the MM are in an advantaged position. However, I do recognize they also provide a useful service as well. Perhaps we should explore ways to take our perception of what those advantages are and how they are applicable to the real arena.
More importantly to me and perhaps others is the ways we can employ our skills and knowledge to protect ourselves and how if possible to work together to provide as much of an edge as possible.
Sincere Regards,
QT
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