Markets, Monkeys, and Deception
by David Reiner
Deception is a constant; it can be found at any time, any place.
Athletes use it to fake out a competitor, politicians use it when they
speak, and markets use it to trick you into doing what you should not
do. Some primatologists refer to deceptive prowess among primates as a
rationale for the development of the large primate brain. The ape with
the larger brain outsmarts other apes for food or a mate, and goes on to
reproduce. In the jungle of financial markets you need to be smarter
than the average market monkey who will do anything to steal your
bananas, otherwise you will soon experience the harsh reality of the
market's version of natural selection. Strap yourself into your seat
and get ready, because we are about to embark on a safari deep into the
realm of micro-cap markets to observe the behavior of the various market
monkeys indigenous to the area.
The Trap
A formidable market monkey is the dishonest stock promoter of a
worthless company. He preys upon the naïve by offering a false gift of
hope in the form of a company that is the "opportunity of a lifetime".
Once enough people buy into the company, the promoter sells into the
volume and the stock begins to tank. Beware of any stock when its price
stagnates during high volume. To avoid being trapped into holding
worthless stock certificates, always investigate the company.
Chaos
The introduction of Bulletin Board stocks into automated quotation
systems, coupled with the informational tools available to the general
public, have generated a great deal of interest in micro-caps. Now
traders can follow Bulletin Board stocks tick by tick via software or
the Internet, access news services, and trade with an on-line discount
broker. As a result of the aforementioned, the dominant market monkeys
(the market makers) have created an added element of chaos to the
already volatile intra-day price movements created by day-traders.
Since a large percentage of trades in the Bulletin Board market consist
of short-term or day-trades, market makers view the barrage of buy and
sell orders as relatively neutral to the marketplace. When the average
Joe buys shares in company XYZ, the market makers know it is very likely
that he will want to sell back his shares relatively quickly. Hence,
market makers sell into the buying and then downtick the stock in an
effort to "shake out" the weak. Since it is tough to know for sure
whether a move is the beginning of a trend, or a routine shake out, this
type of deception works quite well.
The Fake Out
Fake outs are more deliberate moves market makers use to coerce you
into buying or selling. For example, market maker A is short shares in
stock XYZ. Market maker A knows the company is going to issue a
positive news release soon, so mm A is going to want to cover the
position. Now Market Maker A calls up his friendly market maker B and
says "pork fried rice" and mm B, along with other "friendly" market
makers initiate a downtick about the same time. This gives the illusion
of weakness designed to impel selling. The fickle sell out, allowing
market maker A to cover his short position at lower prices.
Market makers aggressively deny any sort of collusion designed to
fix quotes or spreads, but a recent SEC investigation tells another
story. Undeclared short-selling and market maker collusion are two very
important topics we will analyze in the future.
I don't intend for these brief examples to magically transform the
descriptive into the predictive, but the more you know your opponent,
the better prepared you are. Markets infinitely abound in deceptive
activities, and it would take more than a lifetime to figure them all
out. Further coverage of deceptive activities perpetrated by market
monkeys will be found in future essays.
So how does the average speculator manage to overcome deception in
micro-cap markets? One answer is indirection. In warfare, if the enemy
has an advantage due to position or other factors, direct confrontation
is a death sentence. An indirect approach aims to weaken resistance
before overcoming it. Drawing the enemy out of its defenses easily
achieves the desired effect. Your enemies, the market monkeys who use
every trick in the book to steal your bananas, have informational and
positional advantages over you. They know the management well and are
aware of what happens within the company. Furthermore, market makers
are in the position to wield a great deal of influence in OTC:BB stocks
when it suits their needs. The inherent power dealers' garner enable
them to move markets at any time. As a result, you must draw them out
of their favorable position. To draw a market maker of his or her
advantageous position, you must find the great company before the games
begin. Searching for the Holy Grail of the Bulletin Board stocks is
going to require an extensive amount of research time, but once you have
found it, you are one up on the pros.
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