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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: Richard Estes who wrote (967)	6/18/1999 6:58:00 AM
From: Eric P	Respond to of 18137

My wife observes that a block trade above the ask is followed by a selloff. Dang if I am not seeing it alot. This is still true, although not as consistently as it used to be. There is a good reason for this, however. Suppose a market maker has a large institutional buy order for 50,000 shares that he/she needs to fill. The market maker might will begin buying in the open market in his own account trying to 'build up' 50,000 shares to sell to the institution. He may be able to easily by 5-10,000 shares without moving the price of the stock. Subsequently, he may call a few of his market maker buddies to see if they have any large customer sell orders that they can match. Typically the answer is no, although perhaps an additional 10,000 shares may be found. The market maker still needs to buy an additional 30,000 shares and so he begins to go high bid, and hitting all of the offers. The stock begins rising substantially. Further exasperating his buying is that many other market makers now know that there is a large institutional buy order being filled. Therefore, they know the price will keep rising upwards until the order is filled. They will be very unlikely to sell short in the face of this known buying. In addition, they may try a little competitive buying to profit from the expected rise. As the stock continues to be accumulated by the market maker, the stock continues rising. Finally, the market maker has purchased the entire 50,000 shares to fill his order (Note that he has filled the order in his own account in small increments of 100 to 2000+ shares at a time). As his buying stops, the stock pulls back a little and the market maker transfers the stock to the institutional account in a block transaction, printing the 50,000 shares near the peak of the movement (at or above the current ask). Now the entire marketplace 'sees' that the institutional order has been filled and that the buying pressure in the stock is over. This is an opportunity to sell a long position, or initiate a short position for many traders, since it is now 'safe' to sell. => Big buy order filled. Hopefully, this might clarify why a stock will selloff after a big block trade is seen at or above the ask. -Eric