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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: nihil who wrote (96398)	1/17/2000 3:12:00 PM
From: Saturn V	Read Replies (1) \| Respond to of 186894

Ref- < Gap Theory > There is a theoretical basis to the GAP Theory, although it may no longer be applicable w.r.t. a high trading volume stock on NASDAQ as Intel. It has to do with the market maker or the stock specialist on the exchange floor at NYSE. The market maker is responsible for examining the existing buy and sell orders on his books, and is responsible for setting the price of the stock, and he is also responsible for a smooth movement of the stock.For large transactions the market maker matches the buy and the sell orders on his books. However for small transactions the market maker is allowed to trade out of his own account, i.e. for a small sell order the market maker will buy the stock at the "market value", and turn around and sell it to some other buyer later.If a small buy order appears, and he does not have any stock, he will borrow some stock, and fill this small buy order himself, and cover this "borrowed stock" by a later purchase when a small corresponding buy order of the stock appears.In a normal smooth market place the market maker profits a little from these transactions, since his exposure is limited. However on a GAP in the stock, the market makers stock trading becomes a significant issue. For a GAP upwards, his inventory of stock which he bought earlier will fetch him a tidy profit. However if he had borrowed stock( was short) he has a big loss on his hands, since he has to replace the borrowed stock at the higher market value. Thus he has an incentive to manipulate the price of the stock down through the gap, and cover his borrowed ( or short) stock. Thus the GAP THEORY ! You can work through similar scenario's for a GAP downwards. If the market maker bought the proper derivates for each of his private trading transactions, his exposure would be eliminated, but his transaction cost will increase. Clearly the GAP THEORY is tied to what exposure the market maker had, and his subsequent ability to manipulate the price of the stock. However Intel is traded on the NASDAQ, a computerized exchange with multiple market makers. So the GAP THEORY loses validity. Furthermore with the stock being traded on off-hours and on world wide exchanges, the market makers ability to manipulate the stock price gets much more limited. But for thinly traded stocks, and with a single market maker the GRAPH THEORY could still have some validity.