JDT,
What we are forced to deal with is like going to the market and see an ad for a can of coke at 50 cents; you tell the cashier that you want to buy 5 cans; he has 15 seconds to either sell it to you at 50 cents or increase his price to 55. Now if he sees that you really want the cokes or there is a line being made behind you by other customers who want to buy cokes from him, he knows that he can raise the price to 55 cents and still sell the cokes, and sometime to 60; he can sell 5 at 55, 5 at 60 and the rest at 65, so long as those in line think that they are getting a good deal. Moreover, he has nothing to lose by increasing the price so high that customers say they don't want to buy cokes any more because he can then gradually bring the prices lower and sell the cokes at lower prices.
I don't mean to refute the general point that is being made by your post; market makers do have Level III, and a huge advantage (my opinion) over the rest of us. However, although I like it and may expand on it, your analogy is misleading with respect to what MMs can and cannot do. I think it's important for all of us to be both well informed and accurate on the off chance somebody is lurking out there reading all this stuff. After all, if the SEC is scurrying around to all the daytrading offices in the country, why not come here to get a pulse? If I say something wrong in a post, I hope someone will take the trouble to point it out so that the trading community will be better informed.
What is wrong with your analogy is that it implies the MM does not have to sell his stock to anyone at his ASK price until 15 seconds after they say they want to buy it. Not true. (Your earlier comment about how they can cheat and wait even longer, 45 seconds, seems impossible since the time delay option is programmed into an automated system (SOES) that will take action when it times out.) It may be a nit, but in fact he does have to sell to the first person in line when he puts his "coke" on the counter; then he gets to decide if he wants to sell at the same price again, or change his price. In fact he has 17 seconds to do this; perhaps another nit, but that's what the MM manual says. The problem for you is that when you are in the line the people in front of you cannot be seen from behind. I assume the MM can see the line growing as you say, and he can use that information to determine his next price, while you have no idea how deep the line is. So your general point is well taken. But it is not true that he has nothing to lose by not selling to you as fast as he can for as long as the line keeps coming. He has competition, and if one of his competitors decides to undercut his price, his whole line disappears. He might get it back by waiting and hoping, or he can get it for sure by lowering his own price, but then he has missed opportunity to sell at the higher price.
There are several complications to consider. First, you don't know how much "coke" the MM has to sell. He can have as much as he wants hidden behind the counter so you can never measure the risk of being in line against the size of his inventory. His advertisement used to include "limit 1000 shares", but then he was obligated to take consignment orders and display them if the prices were better than his own. Not fair said the MM. Why should I have to sell my inventory cheaper because the client wants to move his small lot at a lower price? OK said the SEC, you can sell the client's smaller quantity on its own, so long as you put it up for sale first. That became pretty common didn't it, and too much of a hassle I guess, so now the MM doesn't have to sell you 1000 shares at a time, only 100 whether it's his own inventory or a clients.
And then there is the thing about how anybody who doesn't want to stand in line can walk up to a particular MM saying here's my money, give me my coke (SelectNet). If this happens, he is supposed to give you up to the size he has on the counter at the advertised price, but he can give you more if you ask for it, or decline to give you more. This little side action can get tiresome for the MM, especially now that so many people know about it and are tired of waiting in line for nothing. He is complaining that he never knows when this might happen, so he could be down to his last lot and get two people wanting to buy it at the same time, both of whom are entitled to get it, so he might have to sell some coke he wanted to keep. Somehow he thinks this absolves him of his obligation to sell this way, so when he sees you coming he pulls down his sign and says sorry, too late, I just changed my mind. So now there is a move to consolidate everything into one line again (The latest SOES/SelectNet proposal). No disadvantage, no matter how small, is acceptable to the MM. Never mind that before he had to sell the one "extra" lot he may have moved 100s or 1000s of lots, or more when things were in his favor.
Now this 100 share at a time thing is not sitting well with the people in the line ready to buy 1000. Instead of undoing the "mistake" of allowing the MM to reduce his size, there is a proposal to induce the MM to increase his sizes by letting him have two separate lines, one for his inventory, and one for consignments. Of course, now that he has gotten the advantage of selling only 100 shares at a time if he chooses, he can keep doing that if he wants to. And if he wants to, he can buy the stuff from his client, and sell it in the consignment line at a better price if he can get it and keep the difference. Even so, if it has the desired effect of increasing the size he uses to move his inventory back to the 1000 limit, it could be a good thing.
People have grown pretty tired of this nonsense, and some folks got the great idea of opening their own consignment shops (ECNs). They have taken a lot of business the MMs want. Sure the MMs can use them to, and they do, sometimes just to annoy the patrons over there (partial filling). They want to have their own shop to compete with these upstarts. After all, why should they have to pay someone else for doing something they used to get paid for.
Lots of folks seem to think the idea is basically sound, and are suggesting we all lobby for one stop shopping, a consolidated ECN. Be careful what you wish for; you just might get it. READ the proposal sec.gov Note that anyone can buy up to 9,900 share at a time using the system; MMs can use it themselves to buy from each other. Note that there is no waiting period before they get in line again (no 5 minute rule). Is this really a good thing?? So you want institutional investors grabbing 9,900 shares at a crack in a steady stream in the same line you have to get in to buy your few hundred? I don't know the answer to this question, but I'd love to see a simulation of the impact on the market before it is adopted. Maybe the NASD has done one, who knows. If so, do you think it shows a reduction in the MM's advantage in the marketplace?? |
