passive market making?

Discussion in 'Order Execution' started by loufah, Apr 10, 2006.

  1. From http://edgar.sec.gov/Archives/edgar/data/885307/000121716006000029/jcs1amendment5.htm , a Form S-1/A for an offering JCTCF is making:

    Could someone give an example of how this works, especially regarding the last line? One JCTCF pumper is saying that this is an "explicit statement in the SEC filing that management will get market makers to put in bids and take the stock higher in advance of that offering."
     
  2. Because there is no liquidity in the stock (the stock have yet commence offering), so there are no sellers, if the "passive market maker" has placed bids, then any 'actual" buyers would have to place their bids higher than the MM's bids, hence pushing up the opening price. The reason being is that the "passive market maker" have perfect knowledge as to who the sellers (the offering corporation, the underwriter via overallocation, and allocated institutional blocks, that's it), and all of the parties would benefit from a higher opening.

    Of course, as the paragraph pointed out, the passive market maker can not place too high bids, since there will be no "actual" buyers, causing the MM having to purchase the security and then potentially turn around sell at a loss. So it is a balancing act.