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Strategies & Market Trends : After Hours Trading(ECN)-The Coming 24/7 Trading Explosion -- Ignore unavailable to you. Want to Upgrade?

To: Richard L. Williams who wrote (57)	4/10/1999 2:46:00 PM
From: Tai Jin	Read Replies (1) \| Respond to of 314

I'll try to answer that. What the MMs do to cover their short positions is a direct result of having gone short to maintain liquidity. Sure if they did not go short at a reasonable price then the only option would be for a buyer to pay a very high price. So the buyer was done a favor by the MMs. Now, the MMs obviously don't want to take a loss either. So at some point they will want to cover their short positions at a lower price. This is where they might try to lower the bid to shake out some shares. They can do this if there is very little or no demand for the stock. Perhaps you are arguing that if there is more than one MM on the bid and the one who is short lowers his bid and the others follow then maybe they are playing games. But the MMs are trying to make a market and maintain liquidity. So if there was no real demand behind those bids then the MMs are free to lower them. They can do this the same day they went short, or gap the price down the next day (all assuming that there is still no demand - if demand suddenly came in the next day then they will gap the price up). ...tai

To: Richard L. Williams who wrote (57)	4/10/1999 4:06:00 PM
From: brec	Read Replies (1) \| Respond to of 314

Well, you brought up the idea of a computer replacing a MM. I wasn't sure what you meant, but one possible meaning is, in effect, a MM who writes (or procures) a computer program which would replace the MM's human decision-making, but still function as a MM would. Such a computerized MM would have to be backed by real cash, just as human MMs currently are. When you hypothesized that one thing a computerized system might do in the case of a sudden influx of buy orders and no sell orders is to set "the bid" at a very high price ($10 in your example) relative to recent trades, I wasn't sure whether you understood that any bid must be backed by someone's cash. It's easy for people without detailed knowledge of how markets work to use vague ideas such as "the bid" or "the price" without tying them to actual real-world mechanisms and implications. I thought it was possible that you were making that mistake with this particular hypothetical. Anyway, getting back to this situation where MMs have supplied an influx of buyers by going short, I've a couple of nits to pick with your description-- MM's don't make money if transactions don't occur...so they fill buy orders... MM's (NASDAQ) or specialists (NYSE) are charged with the responsibility of keeping markets "orderly," which means that sometimes they are required to buy or sell stock when they otherwise might not want to. In exchange for fulfilling that obligation they get to see order flow which gives them an advantage in making scalping profits in normal markets. (Folks, please hold the "evil MMs" comments, OK? What I've just written is descriptive, not evaluative, and does not imply that all MMs always follow the rules or are nice to their mothers.) Suddenly, the MM's look and see that they have handed out a million+ shares of fictional stock... I doubt the "suddenly ... see" aspect, as I think most if not all MMs are aware enough about their positions to know what they're getting into as the situation develops. Also, the stock sold short is real, not fictional -- it must be borrowed for delivery to the buyers.