Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Non-Tech : Meet Gene, a NASDAQ Market Maker -- Ignore unavailable to you. Want to Upgrade?

To: gene_the_mm who wrote (828)	8/28/2000 3:19:39 PM
From: Dan Duchardt	Read Replies (2) \| Respond to of 1426

Gene, I skimmed your post. Mostly pure hypotheticals, and IMHO, not even close to reality. All theories are based on hypotheses that attempt to explain observed phenomenon. If they are good, they enable one to predict the outcome of a set of circumstances. Many times we don't even know for sure what the circumstances are, and must infer them from what we observe, so yes it may be hypothetical. So what? By now I guess you realize that my message explicitly excluded OTC BB stocks from consideration. Still, your observation that the MMs may have held huge inventories at lower prices is valid, and the reason for my laying out the info about it being only a year after the IPO and that my own position was well in the money was that it supports the likelihood of that scenario. It makes it all the more plausible that MMs would be willing to draw down inventories to satisfy the institutional demand. I have no way of knowing how much inventory was being held before the big volume runup that preceded the pull back. I can't even measure with great accuracy how much of the runup was associated with institutional buying, but Thompson's I-Watch seems to think they can make a fair assessment, and their data confirms my hypothesis. Whether you like my theory or you don't, or if you want to brand it as a conspiracy theory makes no difference to me. The issue is whether it correctly accounts for the observed phenomenon. If you have an alternate theory, or perhaps a better explanation based on the knowledge you have from being in your position, then by all means tell us how the price of a Nasdaq national market stock with nearly a billion dollar capitalization can fall 10% in 10 minutes on light volume. I'm more than willing to improve my understanding of the market. The nature of the Nasdaq market, as I understand it, no doubt imperfectly, is that collectively the MMs are OBLIGATED to maintain an orderly market. But nobody has a precise definition of what constitutes an orderly market; there are at best fuzzy definitions of what is an appropriate response to market conditions, and no individual MM can be held accountable for maintaining the order. Reasonable spreads are to be maintained, but no single MM is obligated to make the inside market, or be the first to stand up and absorb a relatively small number of shares to maintain the orderly flow. It does not matter how nicely you try to put it, you in essence propose that MM's . . . are colluding (be it spoken or unspoken) to control prices. Trading is a cutthroat business. . . I maintain that one does not have to cry "price fixing" and "collusion" to believe the theory has merit. We agree that trading is a cutthroat business. How can you follow those words with the suggestion that in a world of fuzzy, distributed requirements, the MMs are never going to act individually, while observing the actions of their counterparts at other firms, in a manner that leads to the collective effect I described? Why should I believe that MMs are not in the business of stimulating the market in the hopes of creating a profit opportunity for themselves? None of you are obligated, when seeing a stock fall x% in y time for no apparent reason, and with no onslaught of sellers to say "Hey, we have an obligation to maintain some order here, so I'm going to do it" instead of saying "When somebody else decides it is in their best interest to buy, only then will I'll compete with him for a piece of the action. Till then I'll buy a token 100 shares here and there every 17 seconds (or in an unspecified "reasonable time" for SelectNet) on the way down." Now what if when the buying is done the MM's are STILL long and do not desire to buy any more? What you seem to be telling us is that MMs step in when it suits their purposes for making a profit and not before. That's precisely my hypothesis. And the events I described are a natural consequence of action, or lack of action, motivated by profits without regard to any obligation to maintain order. Maybe that obligation is hypothetical as well and MMs are just traders like everyone else. Perhaps you might want to discuss what, if anything, really sets MMs apart form any other trader. If there is none, then let's all just acknowledge that and get on with the game. Dan

To: gene_the_mm who wrote (828)	8/28/2000 4:50:09 PM
From: Robert Graham	Read Replies (1) \| Respond to of 1426

Are you saying that MMs do not take on inventories? And when given the opportunity, an individual MM would not attempt to manage the risk of making a market, given that much of the time they will find themselves in the same position as other market makers in the same issue, and MMs business is substantially influenced by the ax where it may be in their interest to minimize risk by following the ax? MMs not taking on inventories would support your risk adverse position on this topic. But I suspect MMs do not make it on the spread as they used to in earlier markets. Electronic day trading has helped to make the markets very competetive for the NASDAQ MMs in this area. So they now have to work toward another source of income related to their business. Given that a substantial part of their profits are likely now coming from their institutional clients, much in understanding how MMs can behave will unfold from this premise. This included that of the taking on of positions. I understand that competition is very significant between MM firms for these institutional orders. The MO for these institutions is to place an order out to several firms and see which firms fills the order the most quickly within the parameters they have established. Then their next orders will go to that MM firm. The worst sin here is not performing on an institutional order. So given the above, does your experience support what I have outlined above? If this is the case, placing yourself in the shoes of the very substantial MM firm that processes many institutional orders, how would you approach the needs of your client and at the same time minimizing the risk on your part? Bob Graham