I found this interesting perspective, regarding MM's and how they operate, on the HABE thread.
Joey
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By: Winthorp
Reply To: None Tuesday, 30 Mar 1999 at 8:40 PM EST
Post # of 1049
MMs...
Ok if anyone is interested in this aspect of what took place today then read on. Others may go on to the next post. The following is just MY understanding and may or may not be factual.
Market Makers (MMs), particularly in the OTC/BB market, have a number of "methods" they can use to help them make more money. Acting within their "official" capacity MMs are supposed to keep a liquid and balanced market by regulating the incoming buys and sells. Their goal is to facilitate trading in particular stocks by utilizing a quotation network to post incoming trades and also trades for their own accounts. They trade amongst each other and a balance is found naturally based on supply and demand. The spread represents the difference between current top bid for a stock and the ask which is the minimum the holders are willing to sell for. Various Market Makers have inventory in the stock you want to buy from people that sold for their bid price, and because you buy at the more expensive "ask" price (or thereabouts) the MM's are able to pocket the difference for their trouble.
Some MMs are worse than others but most engage in subtle (sometimes not so subtle) manipulative behaviors that are designed to make them MORE money than they would normally on a stock trade. Since the amount they can make is dependent on the spread, they sometimes do things to keep the spread wide. In a moderate market the MM can usually keep a nice profitable spread for himself. If volume starts running the spread usually tightens up and the MMs make their money based more on the overall volume of trades. If volume is weak, you might see a wide spread so the MM can at least make it worth his while to pay attention and conduct the trades (not always the reason for wide spread but that's another story).
There are often circumstances that allow an MM so inclined, to try and induce certain movements in the markets they keep. Just like we see opportunities in the markets we play, they have opportunities also. When the situation allows, they will attempt to make certain "plays". One is called a "shakeout". A shakeout usually occurs after a stock (particualrly an OTC/BB) has had a meteoric rise. MMs may have either sold short on the way up and at the run's peaks and/or sold naked shorts or want to stock up down low due to expected demand. This situation creates a large demand amongst one or more MMs to buy shares, preferably at a low price...the shakeout begins.
It usually starts with one or two MMs that try to "walk" the price down by stomping on an ask price. By stomping on an ask price I mean the MMs will take the best ask position (offering the stock at the lowest price) and even in the face of heavy BUYING, they won't move the ask up, in fact many times they lower their ask right in the face of heavy buying! Would you lower YOUR selling price in the face of high demand? I wouldn't. But to the MM playing this game, it doesn't matter. Its just a cost of doing business to them.
Suppose an MM has little or no inventory in the stock and the huge demand caught them off guard, they "sold some shares short" at various levels using virtual inventory (shares they didn't have in customer inventory). They have three days to settle so they need to buy back some shares to cover their naked short sells or be subject to punitive action, hopefully for them they can pick them up very cheaply and make a lot of money.
One way to do this is to induce a shakeout. Keep in mind, stocks that have had huge mega runs in just a few days tend to have a lot of "non-investor" types such as daytraders, momentum traders, position players etc. in them. These types are "weak" shareholders, that won't hesitate to sell, sometimes at the slightest indication of a slowdown or on a profit taking dip. By stomping on the ask and walking it down by lowering their selling price, they also drive the bid down. In the most blatant cases (like today), you'll often see the ask lines cross red over the bid lines on level II real time as the manipulator lowers his selling price to levels even lower than what people have been eagerly bidding for it!
It usually isn't long before the weakest hands start to join in the selling thinking that the party is over. This in turn induces more selling and in the best cases for MMs, "panic selling" occurs. How many of you sold some or even all of your shares during today's shakeout?
Anyway, the price plunges to support levels which is an indication of how many longs, and investors are in a stock. The MMs are usually aware when the market bottoms out. Sometimes an MM or two tries to go lower but if there is adequate support, the stock will cease declining and quickly move back up as shorts are covered, inventories replenished and longs and daytraders buymore or buy back. Depending on several factors it may or may not rise back to and beyond the daily high. If it does, that is very bullish short term. Either way the MMs made out big time. Those that were shorting at the top covered and made mad cash, the others that didn't actively "play" the game just let it happend and made mad cash on the spread over the volume created by the activity.
From a T/A standpoint, after a shakeout, where the levels of support and resistance are established is the best indication of where the stock may go next. There was a floor of solid support at .25 this looks to be about 300% of the pre run up price. This is good. HABE made a run toward the end that was also a good sign.
From the new base at .25 where will resistance be? That is the next question. If we approach and break out of the previous high in the next two weeks then we could be headed much higher. If we can't get that high and we sell off to lower support levels (pre .25) then we may be headed even lower. I predict a moderate increase of support from buy backs and new buyers... HABE is still a good investement and may have an attraction beyond the daytrade/pump and dump variety. I think support will end up around .40-.50 and we go up on news from there. Should be interesting as a lot news is apparently in the pipeline. Hopefully we'll take out those old highs and go on to new ones!
-W |
