SI has almost no effect or if it has any, it is lost in the daily action. There are few institutional participants posting on SI. The institutions represent at least 85% of the action. SI members represent maybe .1% of volume of non-BB issues max. There are obscure OTC issues where SI trades can be meaningful, but trades don't determine persistent price.
This is part of the fact that stock price is not effected by supply and demand except instantaneously or very briefly. Price moves dynamically to reflect the lack of infinite elasticity relative to marginal supply/demand, but then moves back to the expectation of future earnings. This is true of all market mechanisms. It is the rational expectation that determines asymptotic or stabilized price, not the effects of some big operators or all the operators. In fact many big operators won't cause the trend to change by their persistent action, since the price will be set where the marginal trader is willing to operate. If one person is willing to pay up and strongly so, heavy selling may push the price near to zero, but next day when this person buys, they will be willing to pay yesterday's price at least because this person has conviction. They'll try to get it cheap, but if there are no offers because others agree in the same rational expectation, the buyer will have to pay up. Thus the price is determined at the margin by conviction which comes from knowledge.
A big error made in Wall Street is the assumption that big guys know more. In a bear market the big guys buy all the way down. Indeed, it is this buying that enables the market to work its way lower. Price moves in the direction of the book, or in the direction of islands of supply or demand whichever is greater. In a bear market which is never evident until it is long in place, the bug guys are bidding under the market filling the book with demand below. The market accommodates them by picking them up from marginal supply. At the end the big guys see that earnings are horrible so they start dumping. You get denouement and the waterfall end. So much for smart money.
In a bull market the bids aren't pulled when a downside translation develops. Zip, down she goes. In a bear market the bids to buy are sparse so that the market discovers illiquid price states below. A little selling really causes price to fall, so the specialist or MM has to buy. When no one wants it, only the market does, price reverses. A little short covering discovers the inelasticity with respect to marginal demand. That indicates that orders to sell are loading up above, so price suddenly discovers this when a little buying is matched in the book. Zip, up she goes, bear market rally. |
