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To: AmericanVoter who wrote (84351)	12/10/1998 2:12:00 AM
From: On the QT	Read Replies (2) \| Respond to of 176387

Lets review your example and your point: The Market Maker owns 40M shares of a stock, currently trading @70.00. MM sells 5M @70.00. MM has 35.M to play with. The market is @ 70. MM offers and sells 5M @ 69. MM has 30M to play with. The Market is @ 69. MM offers and sells 5m @68. MM now has 25M to play with. The Market is @ 68. MM offers and sells 5M @67. MM now has 20M to play with. The Market is @ 67. MM offers and sells 5M @ 66. MM now has 15 M to play with. The Market is @ 66. MM offers and sells 5M @65. Now the Market Maker goes to the sidelines. It has accomplished its purpose. The Public, following the momentum created by the MM drives the price down to 60.00. The MM now jumps in and buys the stock. Here is my observation: At this point (stock is @65) the MM sold 30 M shares of the original 40M. The average share price received from his sales was 67.50. MM in your example, brought the price down to $65. You did indeed show a scenario where it could be done. You showed how the MM could sell a total of 30 M shares from the time the stock was valued at $70 per share and create a price of $65 per share. Let us say that a MM would do as your example shows it to do. Market Maker in this example, possessed 40M@70ps=2,800M. The Market Maker does its thing, brings the $70 price to $65. In doing so he is left with 10 M shares valued at 65 ps=650M. He also has sold 30M shares at an average price of 67.50 = 2025M. 650M +2025M =2675M. He started with 2,800M he ended with 2675M for a loss of $125 million dollars! MM now looks for new job!:) Seriously, why would a MM, sans 125 million, under the conditions cited ,want to compete with the rest of the buying universe at the new price of $65.00? True, under the scenario you accurately laid out, I would be inclined to agree with your assumption that further downward momentum would probably take place, but what ever the price is at that time, whether created by the MM or not, that is the price for all to take or reject at will! The MM is at no greater advantage then it usually is. The Public is at no greater disadvantage than it usually is. You might say I have my own take on this: MM do influence the Market. MM influence the Market when it is necessary and or to their advantage to do so. We should know that even if it were a fair game, in a head to head competition, the one with the overwhelming bankroll, under certain conditions, will most probably win. In a sense since Market Makers do buy stocks for their own use and since we all are in competition, those that have an edge would most likely fair better than those that don't. One should get little argument that MM are in an advantaged position. It would seem to me that the better case can be made for the MM offering 100 shares to the Public (Retail) at one price and filling let us say 1000 shares at the desired 100 share price and the remaining shares at a less desirable price. A good case can be made for MM under certain conditions, working in tandem to create artificial spreads in price; Less likely with new rules and systems being formed. It seems that some form of Pari-mutuels might be an answer as long as the " take" isn't more than it already is. We will see just how this plays out. Going on a Cruise.. will be back just before Christmas. Lets see, by Dec. 24, perhaps 4000 posts to go through? Perhaps less… not leaving till end of week. Regards, QT PS. How about the enormous affects of the Instinet, ECN, SOES ,Select Net ,Dot etc... big time factor and becoming more important to me.

To: AmericanVoter who wrote (84351)	12/10/1998 6:16:00 AM
From: Geoff Nunn	Read Replies (4) \| Respond to of 176387

Amein, I challenged you to find a counter example to the proposition that MMs have a stabilizing influence on the market when their trades are profitable. The example you posted doesn't provide a valid counter example. The price ranges from a high of $70 to a low of $60. Your MM sells shares at an average price of $67.50 and begins to rebuy after the price falls to $60. This means that he is selling, on average, when the price is high (average=$65), and buying when it is low. Such actions are price stabilizing (variance reducing) as I explained in my previous post. The argument I made about MMs is one that economist Milton Friedman made years ago in a different context. The issue back then was whether commodity speculators have a destabilizing effect on the markets. Do speculators in oil futures, for example, drive up the price of oil? Friedman contended that the answer is no, provided only that the trades of speculators are profitable. He contended that it is only speculators who lose money whose trades destabilize prices. An example of the latter (not Friedman's) may be the Hunt Bros ruinous venture into the silver market in the 1970's. No question the Hunts destabilized silver prices. But they also lost a fortune. They bought silver when the price was high, something like $15-$40 as I recall, (making it artificially scarce), and then they later dumped it, much at prices below $10. This produced a glut when it was already plentiful. Of course, the Hunts paid for their poor judgment (poor forecasting ability) but not before imposing considerable social costs on producers and industrial users of silver. Anyway, Friedman offered a challenge to anyone who believes speculators drive up (average) prices of commodities. Show him an example of how this can be done profitably. I'm unaware that anyone was ever able to meet the challenge. Geoff

To: AmericanVoter who wrote (84351)	12/10/1998 8:47:00 AM
From: BGR	Read Replies (1) \| Respond to of 176387

Amein, Note that as long as the MM was continuing the manipulation, (s)he was losing money, as both the ASP for the shares sold (67.5) as well as the price for the shares remaining in inventory (65) is less than the original share price (70). IOW, the MM successfully pushed the price down but not profitably. Next, the assumption that the downward momentum continues afterwards is akin to predicting the future of equity price trends w/o external forces (in this example artificial selling pressure by the MM), which is unpredictable. You have to assume that the non-MM world is uniformly gullible and irrational for predictability to be realized. An unreasonable assumption if you ask me. The small investor with a finger on the panic button doesn't make 100% of this world, there will be huge pension funds, corporate buyback programs and mutual funds with money sitting on the sidelines who may and most probably will buy these artificial dips. That will push prices back up and the MM will end up losing money. From another angle, the example you present is a so-called free lunch, a money machine. Such opportunities should last for very short intervals in a competitive market. What determines the final starting buyback price of 60? What if one of the colluding MMs start buying back at 61 thinking that the price will never reach 60 and the buy-the-dippers may step in before that? What if another one doubleguesses the first and steps in at 62? After all, the colluding MMs are in the best position to know that the prices have been artificially lowered. Unless some sort of honor among thieves acts as a counter force, in the absence of external manipulation everyone is guessing and prices are moving towards stability. -Apratim.