Now that we have our basic guidelines in place, and we have our
list of stocks from which to work, we can move on to The Approach,
which is very basic in nature, but extremely profitable if done correctly.
What we want to do is look for moments in our stock(s) when a low risk
opportunity to "snatch" part of the spread presents itself. These low risk
moments will tend to occur more frequently when the market is quiet, and
as many of you know, mid-day (between 11:30 and 1:30 EST) is when a
period of quietude begins to blanket the market. That is when the individual
MM will do best. Now, before I provide you with an example, let's
consider what I mean by "low risk." A wide spread (3/8 or more) is simply
not enough to make a stock playable in my view. Not only do we want a
wide spread, along with all the other criteria we spoke about, we want to
see "market depth" on either the bid side of the stock or the ask side.
Market depth is simply defined as a multitude of MMs bidding or offering at
the same price. For instance, if 4 MMs are bidding for XYZ stock at $40,
while only one MM is offering stock at $40 3/8 (ask), XYZ is said to have
more market depth on the bid than on the ask side. The size of the bids and
offers (asks) plays a factor too, but for the most part, we want to focus on
which side of the market has the greatest number of MMs. If neither side
of the market has any depth, the stock should not be considered a play
at that time. One must wait until some form of depth develops. The depth
is what actually creates the low risk scenario I refer to above. You see, our
goal is to step directly in front of the depth, whether it be on the bid side or
ask side, using the large number of MMs as a cushion or hedge against a
sizable loss. So, continuing with the example above, we would want to
jump in front of XYZ's depth at $40 by posting a bid at $40 1/16 for say
1,000 shares. This move would narrow the spread by 1/16 to $40 1/16
bid; $40 3/8 ask. "But Oliver, I'm still not sure why you consider this a low
risk play?" Well, we would now be in a low risk position because if we
were to get filled at $40 1/16, we would immediately offer our 1000
shares at $40 5/16 (1/16 below the $40 3/8 offer), all with the idea
that we would never lose the $40 bid. Did you get that? With 4 MM still
bidding at $40, we want our maximum loss to be 1/16. So, if we are having
trouble getting filled at $40 5/16 and the $40 bid starts to weaken, which is
to say the number of MMs bidding at $40 starts to drop, our intent is to
immediately dump the stock at $40, before it goes away. In other words, if
4 MMs bidding at $40 became 3, then 2, we would immediately sell our
stock at the $40 bid, losing only 1/16, or $62.50. Needless to say, a trader
can lose at this level quite frequently and still not get into serious trouble.
What's more, one 3/8 gain would wipe out roughly six losses (commissions
are not being factored in for the sake of simplicity). Now, I hope the power
of what has just been explained has not been lost. With the new rules in
place, we as individuals now have the ability to step right in front of the big
boys, to cut them off. We can frustrate them, undermine them, take them
on. At will. Of course one needs the proper execution vehicle. Individuals
trading at regular on-line brokerage firms like E-trade, E Schwab,
Suretrade and Ameritrade will not have this market making capability. But
with systems like The Executioner®, the trader truly has market making
power and can play the same profitable game that large world-wide firms
like Goldman Sachs (GSCO), Merrill Lynch (MLCO), Morgan Stanley
(MSCO) and PaineWebber (PWJC) have been doing for years. Below,
we will look at a few real life scenarios with which we used The
Executioner® to fill our orders. You are about to see the sheer power that
one has with such a tool. The rules have changed and the mantle has been
tossed back into the ring for all to grab hold of. I will now show you how to
stake your own claim in this lucrative market-making arena. Let's move on.
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