A Specialist is always making two sided markets, they tend to be "flat" several times a day, just the way the game is played. They "can" hedge, of course, but they rarely do....it's the other professional traders within the industry that engage in more sophisticated hedging strategies. Don
Are these other professional traders MM's? If not, how do they get so their information about who is on the other side of the trade (e.g., a retail trader)? Do they not first see if they can conquer the retail trader by playing with the price--before resorting to hedging?
Most pro's trade highly liquid stocks, not too much game playing going on (of course "some" takes place, but could be pretty costly). When a stock trades a few million shares a day, doesn't matter much where the liquidity is coming from - heck, even the "Dark Water Pools" at Goldman, etc. Hedgers look for entry and exit pricing of the spreads, not so much the individual stocks. Don
You first imply the specialist isn't really the bad guy, then you say the professional trader isn't really either; if so, then who is?
Not sure what you mean, but I think the "bad guys" are the crooks we've been reading about trading on insider UBS up/down grades, etc. Why do any traders have to be "bad guys" - we're just like any other business...mostly "good" guys with a few bad apples. No one has to be "bad" to make money, there is so much slippage caused by the public and institutional trading. Don
I have formulated my own opinions about NY stock exchange specialists (and for that matter the same applies to AMEX)---but what did you mean when you said the above comments: why is it so important to trade in the same direction as the specialist?
The Specialist must "accomodate" orders that move the stock one way or the other in excess amounts, therefore he will be selling when there is simply a single event buyer, say up 30 cents or so (as on the Opening Only Order scenerio), and with all things being equal, that kind of move will generally have a quick reversal back to where the stock was trading a minute before...and, we see more of that now with the Hybrid sweeps, etc. Since the Specialist system has been making money for 200 years, I would rather tried "with" him than "against" him. Whenever we can take advantage of a disparity in the market, we like to do so. It's just like on the options floor, when there is a big buyer of one series of calls for example...we would simply move our price up to a level to accomodate the big order, and the price would generally drift back down (or we would spread off with a calendar spread or a vertical, or the stock itself)... Don
No, never heard of that. How about Den of Thieves? Or do you remember this, "The most valuable commodity I know of is information....even in here. If you're not on the inside, you're on the outside....Do you think the difference between those two guys is luck?" Wake up. It happens all the time.