Below, I hope to educate you on how to take full advantage of the
opportunities the "new" NASD rules have helped to create. Prior to August
1996, Nasdaq market makers were not required to give us access to their
market. They were allowed to post our bids and offers (ask prices)
whenever they felt like it, which was only when they made their full spread,
of course. If we wanted to buy a stock between its wide bid/ask spread,
the market maker would typically let our order sit off to the side, unknown
and unadvertised. Why? Because that curtailed the huge profits he made on
the spread. God forbid! Only if the entire market moved to our desired
price would we get filled. Well, today, things are vastly different. Thanks to
the new ruling, these same market makers (MM) are now forced to either
fill or display our orders to all other MMs, if it improves the bid/ask
spread. That is key. Through the use of ECNs, private electronic
communications networks, we can now post our own prices on the
Nasdaq, making it absolutely unnecessary for us to go "through" another
MM. In this New World, sophisticated point and click order entry systems
like The Executioner® now give the individual trader the same access,
and therefore the same profit potential as the big boys. The only major
difference between the individual and the professional market maker today
is education (know-how) and financial depth (capital). We have dedicated
ourselves to helping you take care of the former. It is your job to take care
of the latter. So, without further delay, let's delve into this wonderful world
of making markets in Nasdaq stocks. Keep in mind, it was once a world
kept closed to us. Today, we are making it our mission to take this
profitable world back by storm. There is a lot of money to be made. And
you are going to learn just how to do it with Pristine's Course in Playing
Market Maker.
Step 1: Defining the Strategy and the Rules
The strategy or technique of a market maker is quite simple, when
you think about it. The MM simply sets out to buy a stock low, and sell it
high, all within a matter of minutes, of course. Needless to say, it's the
"minutes" part that creates much of the difficulty. If you are to become
astute market makers, you must fully understand a few things before taking
the plunge. First of all, the individual market maker (that's you) must
sacrifice or do away with the notion of big profits. The first rule of thumb in
market making is "Never succumb to greed, and always take the easy
profit." The MM must consider himself like a sparrow. The sparrow,
seeing a large piece of bread on the ground below, is content to fly down to
take a small nibble and quickly fly away. Even when the landscape is clear,
and no other hungry vultures are present, the sparrow will satisfy his hunger
by repeatedly visiting the bread to take small bites. In short, the sparrow's
method is simple: To bite and take flight. Then repeat. The MMs function is
no different: To repeatedly grab a small piece of the bid/ask spread
(bread) on stocks that really should already be trading at more
reasonable spreads. Note that I didn't say that his job is to ride the stock
for big profits. In the market maker game, our goal is not to ride profits (in
most cases), but to "snatch" them. Get the difference? One must be willing
to give up the more infrequent, bigger gains for those that are smaller but
come by more regularly. This is how the sparrow gets his daily bread, and
this his how the MM gets his daily spread. I haven't seen too many starving
sparrows, neither have I seen too many hungry MMs. Secondly, the
aspiring MM must recognize that not every stock is suitable for
market making. One of the biggest (deadliest, I should say) errors made
by many novice market makers is looking to the DELLs, INTCs and
MSFTs of the world with which to sharpen their MM skills. Wrong! Not
only are these three stocks bad choices, they are viscious traps. For the
average trader, the above stocks should be avoided like the plague. "But
Oliver, have you seen how well DELL has performed?" Of course I have,
and if you want to position trade or invest in a stock like DELL, you can
and should. But I have seen the above three stocks cause the financial death
of more day traders than anything else I can think of. They are manned by
the richest and most astute MMs in the world, and the competition in them
is tight, fierce and unnerving. In short, the MMs in these stocks will eat most
traders alive. They have deep enough pockets to move the issue 3/4 of a
point to a dollar at will. And they typically operate in tandem, claiming their
victims by the hour. "But Oliver, why not take them on? We are smart too!"
Well, of course we are. But why don't we take our lesson from nature. The
almighty cheetah is the fastest animal alive, right? Yet, when it sees a pack
of deer running across the field, what does it do? It picks the lame or
crippled one to go after, every single time. Interesting, right? Despite being
able to catch any one of them at will, the cheetah always chooses the
slowest, as his victim. We should be like the cheetah, too. Why pick a
DELL, an INTC or a MSFT when there are plenty of other stocks
manned by slower, dumber, and less astute MMs. Make sense? I hope so.
I know that in The Old Testament, David beat Goliath. But in the market,
Goliath always wins. So stay away from the Goliaths. You'll be better off
leaving them alone. Trust me. Lastly, one must never go home with an
open position. Now I know "never" is a long time and if you pressed me I
could conjure up a few reasons why one might want to hold certain plays
over night, but as a general rule of thumb for the market maker, I say
always go home flat. "But what if I am holding a loss near the close?" Then
your only mission in life at that moment would be to kill the trade, at almost
any cost. In a game where 1/8s are singles and 1/2s are home runs, you do
not want to deal with overnight risk. Other styles can. But with this style you
are a MM, not a swing trader or investor. Now let's continue.
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