(Revised and Updated, Please Read, Pretty Please?)
README Version 2.0
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Overview
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Over the past few days a few people have expressed concern on the ICVI regarding Market Maker ("MMs") tactics and wonder how they control the price of a Bulletin Board Stock. The purpose of this document is to try to educate the individual investor on how MMs operate during trading days such as the past four days of ICVI and why they manipulate stock prices under certain conditions, as they have done.
Symbol Change
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First off, let's not forget one important thing that seems to have
have from most people's mind as of late. ICVI has already filed for the symbol change and it is possible this could happen as early as next week. Hurray! Not so fast said the MMs. Now, you see, the MMs MUST cover ALL shorts BEFORE the symbol change! All MMs must have a "closed" position in that market when the symbol change takes place. Now us Rocketeers are mighty slick and we often rendezvous on Silicon Investor, but you also have to realize that the MM's also catch wind of every thing that takes place there as well. We have enjoyed a few quick run ups with ICVI over the past couple of weeks. However, usually the MMs gets stuck as result of the quick jumps in price. They are here to make money just as you and I. Don't think they will settle for a loss without giving you an ulcer or two. The MMs know about this symbol change and have to do their very best to cover all shorts before it happens.
But Cliff, the price of the stock has been dropping consistently over the past 3 days and they buys have outnumbered the sells every single day! Ah, the downside to investing in BB stocks. You stand to make substantially more money in the short term by investing in BB stocks. However, there is also downsides and risk you take. The first being the volatility of Bulletin Board stocks. Over the past you have seen them shoot 100%, 200% and sometimes even 300% in a single day! I know I don't have to say this, but the same can happen on the downside. The second downside to Bulletin Board stocks is the power the MMs have to set the price of a stock, which we will cover next.
It's a full court press folks, and time is almost out for them.
Let's drop into a zone defense and stand tall.
Power of the Market Maker
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First off, we hear a lot of people curse and complain about the MMs and wish they were not here. Simple fact is that if they were not here then there would be zero, nadda, zilch trading. So, as in life itself, we have to put up with their ploys. It is part of the game. Play hard, hold long.
Secondly, there is a huge difference between MMs in BB stocks versus the ones found in a Blue chip. In a BB stock the MMs have the ability, and often choose, to work together maximizing profits on both the spread and the shorts/run ups. This strategy differs greatly in the Blue chips. There the MMs live off of the spread and often attempt to cut each other's throats. They do this by jumping in front of the other MMs on the bid/ask side when there is significant market depth.
Lastly, MMs have the ability to trade with each other. They also can make a buy look like a sell, giving them another reason to drop the bid. Fortunately, todays software gives us access to Level II, and Real-time trades that allows us to see a lot more than before NASD changed the rules. Unfortunately, we still cannot see MMs trading amongst each other. Hopefully we will one day.
Quick Run ups
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Next we'll talk about what happens when a stock has massive run ups in price. The majority of the time the MMs usually end up short after a quick run up in price. This could be due to many reasons. If the MM lineup is pretty tight then the MMs have to become a little more competitive with their bid/ask. Sometimes they have to short the stock just to keep up with the tempo. So their objective is very clear for the next couple of days.
Let us take Friday and Monday, the last to run ups in price. We had about a 30% increase on Friday and about an 89% increase on Monday. Double whammies for the MMs! More than likely the MM's are are really short after those two days. Don't get them wrong, there was a pretty penny to be made in the spreads, but that does not balance the books. Now MMs HILL and NAWE are most likely the most experienced on the stock and most likely to have the deepest pockets. The market opens the next day and right off of the bat there is 4:1 buy/sell ratio. What the heck? The bid just dropped? Yes sir, I'm afraid they can do this. No Fair! Tough :-) The 4:1 continues for the next two hours and all of the sudden you find your gold mine down 25% for the day!!! Yes Sir. The whole time they
took turns covering the pile of shorts that they accumulated the day(s) before. Not only are they profiting from the shorts but they also pick up quite a few cheap shares from the weak hands that sold. Remember, we can team up and create a strong force, so can they. No MM wants to be caught holding too many shares in a volatile market.
About the only time they accumulate shares is when they think a run up is about to happen. The more shares that are in strong hands the better off we are. It does not seem that way right now with ICVI, but it will show in the long term. Our stance is a little different than theirs. We are living for the long term, they are living for the day. We take profits over the long term, they make profits in minutes, especially in heavy volume.
Placing Trades
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No Stop-Loss Trades! The MMs look for these orders and they will chase them if it's worth it.
Perhaps you have noticed over the past that some of us has place all-or-none limit orders to buy, let's say 5 cents under bid. More than likely you will not get filled for a few reasons. First being the MMs want your shares, they don't want you to buy. They have ran the stock down and are looking to acquire as much as possible for the next run up. But Cliff the ask just went below my order and it didn't get filled! Market orders, as I have it, get priority over your limit order. Sometimes you will also see out of sequence trading. Hmm? A lot of the times if placing a limit order to buy below the ask creates a nice floor for us to stand on. Especially
if they are large enough orders, or an abundance of them.
If you are looking to increase your position on a given stock it's advisable to place these limit orders. You are not guaranteed to be filled, but if you can live with that then that's fine.
On the other hand, if you want to jump in on a hot stock be careful about placing market orders for high quantity of stock, especially when the bid/ask is low (5x5). You might end up paying a lot more than you planning when you average execution price comes back from youur broker. For example, let's say you just put a market order in for 10,000 shares of ICVI. The bid/ask sizes are 5x5. You get 500 shares at the current ask. The ask goes up (maybe). This process repeats itself until the order is filled. It's not guaranteed that the ask will go up every time, but I think you see the point. Try putting a limit order in first, all or none, or perhaps whatever you
can get at a certain price you are willing to pay.
In the stock market, your gains is most likely someone's losses. And nobody wants to lose, especially the MMs. Supply and demand will apply when a float is controlled by investors and not day traders. The more shares in weak hands is a recipe for a very volatile stock. MM's smell fear and will try to shake the tree many times.
They can't live off of the spread in a penny stock, so they are looking for every opportunity to make profit. It's not until the spreads becomes 3/8's will they be satisfied with those profits.
Conclusion
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Now I hope everyone has a little better understanding about Market Makers and what drives them. I do not profess to be and expert here, and if someone finds any of the information in error please let me know.
Let us all remember that our stocks will not go sky high overnight. Furthermore, we are in for the long haul. All is good to those who wait. Forget the MM antics and forget the naysayers on this thread. We will have the last laugh. Be patient with the Press Releases. They will come in time. Big businesses do not form overnight. Trust us for what we do for the group. We all thank Macker, Rocket Man and Mr D for their contributions.
Best Regards,
Cliff Daniel |
