Nasdaq turned on its head, insignificant stocks
surge as too many buyers chase too few shares
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
Dec. 10 — Lest anyone doubt that strange things are happening on Wall Street these
days, Tuesday provided some of the most convincing evidence yet: a 73 percent one-day
price explosion for an obscure NASDAQ small-cap stock that commended itself to
investors by issuing a press release denying its involvement with hustlers and insisting that
it really did intend to launch a web-site any day now.
Christopher Byron BBS
Nasdaq trader
UPON THAT CLAIM and nothing else, Miami-based Tel-Com Wireless Cable TV — a
company with few assets, no profits, and total revenues of barely $1.5 million a year —
tacked on another $288 million in market value and, by day's end, was worth roughly $680
million on Wall Street.
This sort of thing would be laughable, except that it's no joke. The buying panic in Internet
stocks has now reached such proportions as to be undermining the ability of the Nasdaq
stock pricing mechanism to function at all.
Even many of the beneficiaries seem alarmed. One such individual - the CEO of an
over-the-counter Internet stock so small and inconsequential as to be exempt from filing
financial statements with the Securities & Exchange Commission (Pinkmonkey.com) -
expressed his bewilderment to the Wall Street Journal on Tuesday. Speaking of investors
who had driven his stock up nearly 800 percent in two days the previous week, to touch
$10 per share for a brief moment on Dec. 1st - Pat Greene said they were engaged in
“absolute nuttiness,” adding in reference to his stock's price, “If it was my money I
wouldn't pay that high for it.”
So-called Nasdaq market-makers have come in for plenty of deserved criticism in recent
years - most particularly for the repeated price-gouging of their own customers through
unjustifiably wide spreads between bid and ask quotes on Nasdaq stock screens. But for
all their shortcomings, they remain the heart of the Nasdaq pricing system, and when it
comes to the Internet sector, they are being given the mauling of a lifetime by a combined
onslaught of day traders and momentum hedge fund operators.
There is a fierce debate now raging among Wall Street insiders as to whether the
distortions in the Internet sector are being caused by the “Big Mo's” (momentum hedge
fund traders), or the “Little Mo's” (individual day traders.) But everyone agrees that both
are playing a role, which is ultimately, all that really matters. Caught in the middle are the
market makers.
The buying panic in Internet stocks has now reached such proportions as to be
undermining the ability of the Nasdaq stock pricing mechanism to function at all.
Unlike the New York Stock Exchange, Nasdaq has no specialist system but instead uses
dozens of independent “market makers,” all posting buy-and-sell orders electronically
before the public. When buyers turn up wanting to buy more stock than the market maker
possesses, he is compelled to sell stock he doesn't actually own in order to meet demand.
In effect, he “sells short.”
In a normal market, the market maker can then turn around and “cover” his “naked short”
position by either buying or borrowing stock from somewhere else, which he is required to
deliver to the buyer's broker within three days. The problem comes when the market
maker can't find a “borrow.”
When a stock is thinly traded and there is great buy-side demand, a scarcity develops in
the market and market-makers wind up developing huge short positions that they can only
cover by bidding up the price of the stocks in question high enough to induce holders of the
shares to sell.
This process is greatly intensified when large numbers of buyers converge simultaneously
on market-makers, looking to buy — which is what has been happening with Internet
stocks this autumn.
A large number of day-trading chat rooms and web-sites are now actively tracking all
manner of Internet stocks, looking for (and trying to anticipate) any upward momentum in
the price. When they see signs of it, they pile on and begin buying, which causes share
prices to surge out of control. The market makers try to cover their own short sales and
this simply forces the price higher and higher.
This is what happened in September with Amazon.com, which rose 72 percent during the
month. Close to 10 percent of the stock's total volume that month was accounted for by
one small and obscure day-trading firm, Broadway Trading LLC, in New York. The day
traders will tell you they made a fortune on the stock that month. The hedge fund
operators will tell you they were just “picking up dimes in front of bulldozers.” The real
losers were the market makers who provided the liquidity.
This excessively lopsided buying frenzy means that roughly 20 Internet stocks - among
them eBay, Amazon.com, Go2Net, Telcom Wireless Cable TV, and Onsale - are
currently categorized by Nasdaq as “UPC 11830” stocks, meaning that they are barred
from being sold short by retail investors because it is impossible to find borrowable stock
in the market to cover the short positions. The list changes daily. But if buyers still want to
buy them - which they obviously do — and market-makers are willing to quote prices for
them when they don't actually own the shares, even these UPC-11830 shares wind up
getting shorted - not by the day traders but, once again, the market makers.
Internet phantom stocks
These 19 companies are listed by Nasdaq as unable to be borrowed and sold short by
investors because there is no market liquidity left in the stocks.
Security Name
Amazon.com, Inc. Symbol: AMZN
Common Stock ($0.01 Par Value)
AmeriTrade Holding Corporation Symbol: AMTD
Class A Common Stock ($0.01 Par)
Bluefly, Inc. Symbol: BFLY
Common Stock ($.01 Par Value)
CDnow, Inc. Symbol: CDNW
Common Stock (No Par Value)
CyberCash, Inc. Symbol: CYCH
Common Stock ($0.001 Par Value)
EarthWeb, Inc. Symbol: EWBX
Common Stock ($0.01 Par Value)
eBay Inc. Symbol: EBAY
Common Stock
Euroweb International Corp. Symbol: EWEB
Common Stock ($ 0.001 par value)
go2net, Inc. Symbol: GNET
Common Stock ($0.01 Par Value)
Greg Manning Auctions, Inc. Symbol: GMAI
Common Stock ($0.01 Par Value)
Infonautics, Inc. Symbol: INFO
Class A Common Stock
K-tel International, Inc. Symbol: KTEL
Common Stock ($0.01 Par Value)
Navarre Corporation Symbol: NAVR
Common Stock (No Par Value)
NetGravity, Inc. Symbol: NETG
Common Stock ($0.001 Par Value)
Online System Services, Inc. Symbol: WEBB
Common Stock (No Par Value)
ONSALE, Inc. Symbol: ONSL
Common Stock ($0.001 par value)
Source Media, Inc. Symbol: SRCM
Common Stock ($0.001 Par Value)
Tel-Com Wireless Cable TV Corporation Symbol: TCTV
Common Stock ($0.001 Par Value)
Tel-Save.com, Inc. Symbol: TALK
Common Stock ($0.01 Par Value)
SOURCE: Nasdaq
In fact, reports have lately begun to circulate that even retail traders are now adding to the
short-pressure. Believing the Internet sector has finally topped out, a small but growing
number have started shorting stocks in the sector themselves. Since liquidity is so tight in a
number of the stocks being shorted that they are almost impossible to borrow, the traders
are “going naked.”
While illegal under Nasdaq rules, some day trading firms are said to be allowing their
clients to do so anyway if they agree to close out their positions each day. The risks, of
course, are enormous, because if the stocks involved actually rise instead of fall, the day
traders wind up finding themselves in exactly the situation of the market makers, having to
chase stocks higher and higher to cover their positions.
Consider the situation that developed Tuesday regarding the aforementioned Tel-com
Wireless Cable TV.
TCTV's share price had heated up in the previous week over speculation that the
company would launch an Internet site. But then came a negative story in Barrons,
questioning the company's possible involvement with a group of apparent stock promoters.
Then, when management put out a press release denying the charge and reiterating plans
for an Internet site, a tremendous surge of buying orders hit the stock at the opening bell.
“It was like a tidal wave,” said one market-maker in the shares.
This spike set the tone for a day-long surge of buying by day traders and offsetting
short-covering by market-makers. The buying and short-covering came almost hourly in
waves: at 9:30 a.m., 10:30 a.m., noon, and then twice more after lunch. By the closing bell,
Tel-Com Wireless Cable was up an incredible 73 percent on the day, for no justifiable
economic reason whatsoever.
How much longer this situation will continue is anybody's guess. But a massive collision
has occurred in the American stock market, between the forces of a technology-driven
buying frenzy on the one hand and the mechanics of pricing stability on the other. The
sparks being thrown off are lighting Wall Street in ways rarely if ever seen. It is, in a
word, a time to remember. |
