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Non-Tech : Market Makers - What They Do and How They Do It -- Ignore unavailable to you. Want to Upgrade?

To: Doug Coughlan who wrote (305)	11/1/1999 12:45:00 PM
From: 10K a day	Read Replies (1) \| Respond to of 429

but i think that is, in fact, bogus, because somebody with limit sell order, and Joe Public or Joe Markie,,, steps in front with a MARKET sell the book, and all the Markies drop or cancel their bid, so That is bullshit, because a Markie is a Markie, when it is to their advantage,,, and they are not a markie,, when they are about to get their head handed to them,,, and they prop, or drop the price/bids, based on the short term,, gains on the whole, whether a combination of Options, or margin interest, or stock, or whatever.....

To: Doug Coughlan who wrote (305)	1/8/2000 7:09:00 PM
From: Rob S.	Read Replies (4) \| Respond to of 429

There are some ways to use the way market specialists and to a lesser degree but similarly the market makers operate to make profits. For instance, when bad news hits a stock to the extent that it causes a sell-off and order imbalance when the stock opens the next day, you can "get on the side of" the market specialist (NYSE has one specialist per stock while the NASDAQ has up to several MMs who serve a similar function). This happened recently with Lucent, LU. Lucent warned on Thursday that they would not meet sales and earnings objectives and stock dropped about 20 points. The news was widely broadcast and discussed and thus discounted into what would happen the next day. The specialist was presented with a backlog of sell orders for about 20 million shares - a huge order imbalance. When there is an order imbalance, the specialist (or MMs) become the "buyers of last resort", that is they must buy the stock that sellers have ordered to be sold "at market" before the open. In return for their providing an "orderly market" in the stock via being the buyer of last resort, the exchange and laws grant them the ability to set the opening price and temporarily control the order flow. You will see what I mean if you look at Friday's day chart for LU. So what does the specialist do? The specialist firm (mostly a few very large firms with hundreds of millions or billions in assets), has to fix an opening price at such a level that they think it is unlikely to move lower. After all, they are going to buy all the market orders, in this case several million shares. So they will naturally set the price low enough that it is likely to move up a bit from where it opens so that they can sell off the shares they purchased at the open. Again look at the chart for LU. Lucent opened at around 51 but moved up to a high of 58. Volume was huge. The activity was tightly controlled so that the price fluctuated in a narrow range all day. Despite the narrow range, the specialist was able to buy the stock near the low for the day and then sell it at a higher price. If you watched the ticker you would have seen that massive selling came in whenever the price moved to around 54. That is probably because the specialist was selling his several millions of shares at that price. Hmmm . . . maybe 15 million shares at a profit of at least 3 for the morning - $45 million in quick and assured profits. The market got what it needed - an "orderly market" where the stock price did not crash through the floor in a vacuum of buyers and the specialist got paid handsomely for assuming the risk of buying a fortune in Lucent stock at a time when there were more sellers than buyers. What if the market tanked much further after LU opened and the specialist found he was holding shares with no buyers? As well calculated as their purchase was, there was still a chance that they would loose money. OK, the odds are very much in the specialists favor but occasional their best plans go haywire. How can you participate in the trade to make an nice return with almost no risk? You can buy on the shoulders of the specialist. you do this by putting in a market order to buy stock before the market opens. The rules of the exchange require the specialist or MM to fill your order at the same price and before they fill their own order. So you buy the stock at exactly the same price as the specialist. After the market opens, you watch the real-time day chart and order flow and sell it when the price rises - usually within a few minutes after the open. Assuming that you wouldn't get the high for the day of 58, you should have been able to sell it easily for 54. That would be a profit of about 3 or about 6% in a few minutes. The best thing is that your risk is limited - the history of this type of "trading with the specialist" is extremely good. The only bad thing is that you have to wait to find stocks with bad news where the news is widely disseminated before the market opens. If the news makes the Nightly Business Report and CNN and other financial broadcasts and there is a big order imbalance before the open, then this works almost 100% of the time. Quit your petty bitching about MMs and specialists. We all make money by taking advantage of market inefficiencies - like stocks that are under or over valued or the actions of MMs and specialists. Either learn how to play the game or buy mutual funds.