Tazio, et al.
At the end of the day, yes for every buyer, there is a seller.
There are probably many messages I could have replied to for what follows, but this one is as good as any. It proves I have at least read back this far in the thread :) I'd like to pose a theory for discussion that comes out of my own attempt to understand the dynamics of the market. First of all, I question the conclusion that at the end of the day for every "buyer" there is a "seller". Of course there are two sides to every transaction, but if we allow that there is a third type of entity involved, one that stands as a buffer between "true buyers" and "true sellers", than there is no longer a conservation principle that says # buyers = # sellers on a daily basis. I think we can all agree that a third entity does exist; they are the market makers (and on a much smaller scale, private short term traders). In principle, the MMs exist because in any one day or during smaller time intervals during the day the buffer is needed so that buyers always have a place to buy and sellers always have a place to sell (maintaining an orderly market and all of that). Many of the MMs have deep pockets and rather large storehouses of the stuff we all buy and sell, so they are capable of absorbing more from sellers on any given day, or distributing more to buyers on any given day. On the average over many days # buyers = # sellers, but in any one day it's up to the demands of the market and the collective MM's willingness to go at risk that determines the ratio of true buyers and sellers.
I don't buy and sell OTCBBs (Well I did buy 100 shares of one at $1.30 one day based on a rumor. Lost the whole $130 when my broker could no longer come up with a price for the worthless stock and locked up my entire account because of it. Had to let them dispose of it somehow.) I don't want the focus of my question to be on BB stocks, but I think it's worth mentioning in the context of my comments. I understand the concern of the people who are up in arms about naked shorting because that is the sort of thing that disrupts the balance between true buyers and true sellers. Somewhere down the road things should eventually balance, but in the meantime the expansion and shrinking of the buffer easily obscures the level of buying and selling interest.
Putting aside the special problems and risks of the BBs, I want to talk about the dynamics of stocks in real companies that make real products or provide real services, get paid for them, and report profits to shareholders. I'll use a particular stock I owned and later observed that was an existing company, well established, generating profits, that did a $500M IPO in 1998 at about $12/share. The stock had a small runup to about $14 or $15, then retreated and languished for about a year. I accumulated some until my net cost was about $7.50 per share. I did not watch the stock too closely until a year later when it started a fairly steady climb, got a bit more volatile, then surged $2 to $15 per share on a 4M volume day and I was looking at over 100% profit on paper, a profit I could ill afford to let slip away at the time. Next day it hit $15.5 then over the next few days drifted back to $15. The next day it was hanging on to $15 for a while, dipped a bit below and then the dam broke. In less than 10 minutes the stock fell almost to $13, over 10% drop in 10 minutes. Volume during that fall was remarkably light with the majority of prints in the low hundreds. Not what I would call real selling pressure; nobody dumping huge blocks driving the market lower. We all see this over and over again, and I've come to think that the dynamics go something like this:
Institutions start getting the idea that they want to own stock in a good company with great growth potential in a booming industry (semis) and start calling up the MMs with their buy orders (or maybe the MMs send out some messages of "sell interest"). There are not nearly enough "true sellers" to satisfy the big buyers, so the MMs deplete inventory or sell short to get the big buyers everything they will take. Of course that drives the price up.. the MMs are taking on some risk, especially if going short, and the big guys are going to have to pay the price if they want the shares. Come the end of the day, and during the following couple of days the MMs have depleted inventories, or are maybe even left short doing everything they can to find stock to buy, at a lower price than they sold it of course, but bidding 1/4 less or even 1/2 less just isn't enticing the sellers. This was a stock on the rise. Nobody who had held through that year of doldrums was anxious to unload this stock that was now one of the hottest things around- no way was I going to sell on a little pull back to $15 or even $14.50 and the people who bought the breakout at 15 and above were still hopeful of making a profit.
So what are these poor MMs who had placed themselves in this risky position going to do to get people to sell them some stock? Raise the bid? Take a loss? I don't think so. Let's not use nasty words like manipulate, or talk of things like collusion or conspiracy. They are not needed. (And for this discussion I'll withhold my thoughts about whether the MMs are entitled to make a profit for putting themselves in this position.) Instead let's allow for the possibility that there is a collective understanding among the market professionals that they are in the same boat and there are times when competition among themselves is not in their best interest. They know they are all light inventory because they know most of the stock they sold the last couple of days went to the institutions, who are not interested in selling it back to them.
No phone calls are needed.. no secret conspiracy.. just all savvy guys/gals who know what has happened to create this situation. The only thing left is to pull out the bottom and stimulate a panic sell by the public. Suddenly the bids start evaporating and the fearful begin to bail out. Some of us wait thinking it can't go too far.. this is a good stock... 14.5.. hmm this is not good (The phrase "walking it down" pops into my head)... 14, maybe these people know something I don't? Is there news? 13.5, even I may have to get out now.. I can't keep the rest of the herd from selling and these MMs are not going to stop this thing from falling until some real buyers step in to force their hand. 13.25.. below the prior high before the runup to 15.5.. support is failing. Finally some smaller buyers jump in and force the MMs to bid up if they want to keep a piece of the action and rebuild their inventory at these lower prices. And where are all the institutions who would love to own this stock down here at 13-14? Well maybe they understand too that you can't get blood from a stone. The MMs are no longer in a position to sell from inventory and need to replenish the supply, so they back off, or maybe they are simply turned away by the MMs.
Now the MMs are a bit more comfortable.. the inventory is growing.. the cash register is ringing with the quick 10% reward for the risk they have taken, the risk of trading instead of just making a market as an intermediary between real buyers and real sellers. Gradually they are willing to pay a little bit more and even start selling again so the stock can go higher, the institutions can come calling again, and the whole process repeats itself.
Remember, I said this was a theory. I'm not a market professional, just a guy who at times has figured out why things work the way they do. I open the door to those of you with more experience to refute this, or come up with a better one, but I will point out that there is nothing in this that talks about an MM having it in for any single investor with 300 shares of stock. Of course the notion of repeatedly singling out individual traders to toy with is preposterous, but the notion of an approach to dealing with the public at large that is distinct from dealing with the fewer pockets of big money is not so easily dismissed.
Dan |
