To N.Wayne and Group: MMs can, and will, play games.
You raise an important and timely subject. In view of the sudden morphing of AXC into the speculative realm of the "Internettes," it's probably a good idea to present some information on the role of specialists and MMs.
As AXC rises into cyberspace, the stock will be subject to greatly increased volatility. A great deal of this volatility will be caused by daytraders, stop loss/stop limit orders and shorts--all amplified by the absence of options (soon to be re-initiated?). Along the way, MMs are certain to manipulate the stock.
Here's a piece I did at Motley Fool on the recent manipulation of BCST. The irony of its relevancy is not to be missed! (Note the link to a backgrounder on MM and specialist whistleblower, Richard Ney, at the end.)
BAM
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"BCST Shareholders: A Word about Market Makers"
It is said by the "Wise" that Market Makers (NASDAQ) and Specialists (NYSE) "provide liquidity" and "maintain orderly markets" for stocks, putting at risk their own capital to do so. In the real world, this notion is largely a fiction.
In view of BCST's recent volatility, I thought it might be useful to introduce this subject and post a link to insight into this opaque and dangerous shell game.
One should realize that BCST's quick retracement from the recent high has occurred largely by design. It is a Market Maker's opportunistic maneuver and it's quite detached from the firm's fundamentals. Retracements occur from time to time, and their duration is generally short. The current retracement cycle appears to be about over.
Why does retracement occur? There are a variety of reasons. Let's look at one. The problem can arise when Market Makers for low-liquidity firms (few shares in public hands, called "float") like BCST have little or no stock inventory to deliver. There are so very few sellers that MMs have trouble filling orders. This, in turn, creates large bid-offer "spreads", and great price volatility.
When you put in a buy order for 50 or 100 or 500 shares, don't assume there must be a seller. There probably isn't. A Market Maker (there are several for active NASDAQ issues, one Specialist for each NYSE stock) can either raise the "offer" price for the shares, or can deliver stock to you by *shorting it*. And unlike a small investor, should he short the stock, he doesn't need to borrow shares to do so.
Basically, a Market Maker can deliver stock to a buyer with an "I.O.U."
Now, if a Market Maker continues to sell short as a way to fill buy orders, what happens is that the stock's short interest (total number of shares short) starts to rise. And this has happened to BCST. As of mid-December, about 1mm shares, or 35+ percent of BCST's float, was "short". Of the total short interest outstanding, probably 85 percent is attributable to Market Maker shorts. A number like 35+ percent is a very high percentage and a very bullish sign, as these shorts must eventually be bought back. The only unknowns are "When?", and "At what price?"
Market Makers have lost money shorting BCST (and many other Internet stocks) to fill orders. As the price rises, their hole tends to deepen. For this reason, a number of Market Makers have recently withdrawn from dealing in Internet names.
There are several ways that the Market Makers can work off their current problems with BCST.
One way involves using options to hedge their risks; these will start trading early next month (postponed from late January).
The second way will occur more naturally, and evolves from the greater liquidity that will occur in BCST's stock next month, after the recently-announced 2-for-1 split is effective.
The third way is well, not very nice. It is this third way that is now affecting BCST shareholders; thus, it is essential that shareholders understand its nature.
To be blunt, it involves *price manipulation with impunity*. Under cover of a general market sell-off like this week's Brazil story, the MM's will take a stock's price down relentlessly--to a level sufficient to trigger many stop loss and stop limit orders that have been placed over a period of time.
The key is that, while there are few active sellers in a market environment like this week's, there are always "weak hands": stop loss 'sellers' who can be bumped out. By triggering these stop loss orders, MMs can cover at profit a portion of their shorts and build inventory for sale at higher prices.
In the end, Market Markers are concerned with "cash flow", not "order flow."
In the early 1970s, an author named Richard Ney wrote a fascinating expose on the role of the Specialist and Market Maker. While the future offers prospects for 'reform' of the current system (largely by bypassing it), little has changed so far. Ney's work is still highly relevant and highly recommended. The following link will intoduce him.
BAM
w3.trib.com
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