Apakhabar,
An interesting reply, but I'm afraid you are attributing to me a general attitude toward MMs, and beliefs about how they operate that I do not hold. We also seem to have a different perception about the market, which is fine. My understanding is based on what I observe, and what I have read, and continues to evolve. I've really only experienced the market first hand from the point of view of a small player in the great sea of "the public", so what I infer about what goes on is an attempt to make sense out of what seems at times to be a chaotic phenomenon. I certainly hope to improve my own understanding and become a better trader.
The first flaw I find in your theory is that the MMs are just stupidly selling LARGE amounts of stock short, thereby taking on a huge risk. My belief is that if there is so much demand the MMs will just let the stock go up. What do they care if it gets bid up from 15 to 25 in a day? You didn't see the MMs get upset that AMZN went up to 600 after Blodget targeted 400, right?
"Stupid MMs" was the farthest thing from my mind in laying out my theory. If anything, perhaps I give them more credit than they deserve for knowing exactly what they are doing and why they are doing it. Your example of AMZN, or many other stocks going crazy may apply to a general buying frenzy on the latest hot *.com, but I think that is distinctly different from a lesser known stock that suddenly has large institutional demand that cannot be balanced by institutional or public selling.
I believe it helps to simply imagine that you were the MM in your example. Would you have sold all that stock short at 15? Or would you have sold a a few hundred at 15, a little more at 16, and in fact, "walked the price up" to a level where you felt you were NOT taking such a big risk?
Here's where we might get some help from the professional contributors around here, but my understanding is that institutions and the public at large behave in a very different ways. In a buying frenzy with heavy public interest the MMs might very well let the price go as high as the world will take it, but when an institution communicates to an MM that it wants 100K shares or several times that much at such and such a price, the MM has to make an assessment of how much stock he can get at a lower price than the institution is willing to pay so that he can supply the stock and make his mark-up. In this case the top price is set by a relatively few entities controlling huge amounts of money instead of many entities controlling small amounts of money with no predetermined limit on what they are willing to pay. The MM must try to keep the price low enough to fill the orders for his big clients and make a profit, and even has a mechanism within the rules for doing it by selling small amounts of stock to the public while buying all he can at a lower price. If the price runs away, those big orders will not be filled and those institutional investors will not be happy.
However, assuming a MM was fooled by the demand and he did sell too much short at too low a price, how do you get the idea that other MMs want to help this guy out? When did a "We're all in this together" type of socialism become part of the trading world? I believe that if other MMs suspected that one of "their own" was too short for his own good, they would much rather squeeze the poor devil into submission and make some money for their own coffers.
This is really the heart of the matter. Conspiracy theorists seem to take it for granted that these guys not only look out for one another, but actually plan and scheme together about how they are going to milk the public out of their money. I don't doubt for a minute that there are instances where such things have occurred, but I don't think it's "rampant" or common. What I do know is that in all kinds of human endeavor, serious competitors will often form temporary alliances because for some period of time, or under a certain set of circumstances it is to their personal advantage to do so. In most cases no words need be spoken. The benefits are clear to all and the alliance lasts only as long as it is to the benefit of everyone participating. "Drafting" in race cars is a simple example; some small number of cars will line up to reduce drag so they can run away from the field and will cooperate in this fashion until they accomplish their objective. But as soon as one of them decides to break out it's everyone for themselves again.
IMO the MMs just aren't going to take on a big short position until they have a good idea at what level the "true sellers" are willing to sell. I just can't imagine other MMs would sit by and do nothing while a stupid MM got into a bad position. Even harder to imagine is that all the MMs together got into the stupid position at the same time. These people are by and large GOOD traders, not a bunch of chumps. I think it more likely that when a MM proves to be a chump, he gets fired, not bailed out by his or her contemporaries.
I can't know for sure that anybody went short. Maybe the underwriters were still holding substantial inventory and had stock to sell at a profit. The one thing I'm pretty sure of is that after a period of selling large blocks to institutions at a rate far in excess of the small buying they could do from a few individuals satisfied to take profits, inventories were depleted. And it wasn't being done by a single "stupid MM" sticking his neck out far enough to get it cut off. It was being done by several of them, knowing full well from their assessment of the supply and demand that they were not alone. To make more profits they needed more stock, and since the institutions were all buying and holding the only source of stock was the public. You may be right that if one of them gets out on a limb the rest would be happy to cut it off, but I don't think for a minute that they are stupid enough to go out there alone. I do think they are smart enough to have a good idea of where the stock is, and to see that the demand is so great that they can extend themselves a little knowing full well that other MMs are doing it and that they may have to "line up" for a while to stimulate the public into reluctantly selling stock at a discount. They will go out on the limb a little way together as long as they know there is nobody staying back to cut it off.
When you say the prints from 15 to 13 were only for a few hundred shares, you describe that as "not real selling pressure". A more accurate description would be that buyers disappeared, that there was no buying support.
Buyers disappeared because the MMs were the buyers, and they wanted the stock at a lower price. The institutions had been well fed, at least for the moment, and if there were any still wanting stock their customary source, the MMs, were not now selling. The MMs were buying. When I say "not real selling pressure", what I mean is that investors, including the big money institutions, were not anxious to sell because the fundamentals of the company had changed, or the market generally was looking bad. It simply means that in this case the cause and effect were reversed from what we might consider normal. The price was not falling because there was an abundance of stock that people really wanted to sell that drove the price down. The price fell because the selling was induced by a collective willingness on the part of the MMs to wait for someone else to provide the liquidity needed to stabilize the price before starting to accumulate stock at a discount. For 10 minutes they stopped competing. They simply "lined up" and watched the price fall. And three days earlier when they were depleting inventory to satisfy the institutional demand they did it knowing full well the odds were in their favor that they would be able to replenish their supplies from an induced public sell off.
These guys are not stupid. We agree on that. In fact they are very, very GOOD!! and they have more tools and money at their disposal than the public. That puts them in an advantageous position. As individuals, we can never know all that they know about their order flow, inventories, institutional demand, etc. We may deduce it after the fact, but they know it as it happens. The best we can do is learn to understand what makes things happen the way they do and how to turn that to our advantage instead of getting slaughtered with the rest of the sheep.
Dan |
