A lot of reading but another great one on MM games:
digitaltraders.com
Here's part of it. Best to go to the site so you can see the Level II screens as well.
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Market maker firms like Merrill Lynch - MLCO, Soloman Smith Barney - SALB, Goldman Sachs - GSCO, Herzog - HRZG, Troster Singer -
TSCO, and Nite Securities - NITE, just to name a few of the hundreds of active market markers, as mentioned earlier, are notorious at
playing games. The perform "Head Fakes", Shake outs, Fading, and all in all, just cause general chaos when they choose to, which
seems to be just about most of the time. Many traders and their trading accounts have succumb to the antics of these firms. As a day
trader, keep one thing in mind. Day trading is war. It is a never ending battle against some of the biggest trading houses in the world.
I want to reiterate that market makers want your money, and will stop at nothing. The will do whatever it takes to influence you into
making buy and sell decisions. Your number one best advantage is to learn and understand the movements of the market makers, so
that at least you will have a basic fighting chance to maneuver your way through the never ending maze of volatility created by their
actions.
Level II is purely suppy and demand based. You have buyers and sellers. The market maker's job is to simply fill customer's orders, and
make profit for their firm. Once you learn and understand how market makers work, and how they think, your will have a greater
opportunity to capitalize on their movements. One of the important things to remember is to try to think like a market maker. Then
when you can do that, then you will understand a concept I refer to as "Painting" the market maker. To "paint" the market maker is to
capitalize on his actions, or rather, do as the market maker does, by copying his actions. To do this, you must first learn and recognize
his intentions.
Example of this would be watching the market maker buying or accumulating shares. He will move to the inside bid, take in a few sellers, then back
off. A few minutes later we see that he is again buying back shares at a lower price. He then backs off from the bid, waits for the stock price to go
lower, then buys more. He may first have jumped to the ask with a large size, to make the stock appear that there was a weakness, when it fact,
he was accumulating into the weakness. This means that as the stock moved down, the market maker is buying into the weakness. Later, when
the price of the stock moves back up, he then sells off the previously accumulated shares, selling them at a higher price for a profit and filling his
clients orders.
Once you recognize that a market maker is accumulating, and has finished buying into the weakness, that is the time that you should consider
buying.
One of the things that market makers are famous for, is to run a stock up in the premarket, (gapping) then sell it to the oncoming buyers
(shorting). The market makers would just love to sell you stock at a much higher price than what it is valued at or at a higher price from where
they bought it earlier.
Typical real life example: So you see the stock gapping in the premarket trading. You buy in, taking a position. You even see other buyers coming
in. Then suddenly, the market makers begin to line up on the ask, display large sizes, implying that they are ready to sell, or at least post an offer
to sell large quantities of stock. They are doing this to make the stock look weak, forcing those who bought stock earlier to sell, thus bringing the
stock price back down, forcing, in many cases, a major stock sell off.
You see this. You begin to get concerned that something is not right here. Your trade is turning on you, and very quickly. There is nothing but sells
coming in from panicked sellers, just like you, who, just 15 to 20 minutes ago, were very excited and happy that they believed they got in early on
a trade that was going to be very profitable. After all, it must be a good stock if it is gapping up right? WRONG.
This is done to catch traders off guard. After the forced selloff, the market makers will line up on the bid, only to just sit and wait to buy back
stock from previous buyers, who are now scrambling or panicking to sell, at lower prices than where they bought it earlier. This allows the market
makers to cover their short position, and do so with a profit. Quite often the unsuspecting traders get caught flat, thinking that the stock is going
higher, only to lose a great portion of their account. One of the moves to watch for is premarket bidding by the market makers. Watch for market
makers pushing the bid up, and particularly without any bidding support by any ECNs. Market makers know that they cannot be hit in premarket
trading other than through selectnet, and then they would fill only at their option. They will often use INCA to artificially raise the bid, or overprice
the stock. Thus, the market makers make the stock appear that it is moving up, giving the impression to the unsuspecting trader of an immediate
price increase, and that they should move on it to "join the wagon" of those looking to make quick gains on the premarket gap.
Another action to watch for is market makers working large orders
Keep in mind that market makers, on the broker side of the trade, are paid commissions to fill orders for their customers. They want to keep the
client happy by getting them good pricing, while at the same time making a profit for their firm. They want to make sure that their customers keep
coming back to them. This represents business and lots of profit.
Here is an example of a market maker working a large order.
Lets say that MLCO (merrill lynch) receives an order for 100,000 shares of LCOS (example only). He may tell the client that it can be done at
different pricing levels, say 50,000 at 90 1/2, 20,000 at 90 5/8, 10,000 at 90 7/16, and 20,000 at 90 7/8.
Once MLCO receives approval of the order, he then goes to work. Because MLCO wants to make profit, he will attempt to force the stock price
down to a level where he can buy shares from sellers. In previous examples, we examined ways that this can be done. MLCO will work the order at
the different pricing levels. First MLCO will need to accumulate the necessary shares at lower prices. He will often take the opposite side of the
trade to get those shares. He will use INCA or ISLAND to make it look like he is selling when in fact he is buying. |
