One final note on openings - when an institution is buying or selling a stock the trader does not give the whole order to the Specialist on the opening. If I had to sell 300,000 shares of ANN, I would only give 25,000 - 50,000 shares depending on how big the opening print was going to be, just to test the water. Then I would see which way the stock was trending, and act accordingly. Nobody is going to show his hand, and it is very rare for an institution to buy/sell their whole order on the opening print. The Specialist is very much aware of this fact, and that is why he is not always a part of the larger prints that go up later in the day. If I continuously feed 25,000 shares of ANN to the Specialist without telling him my size, do you think he will take a chance and buy any significant amount of stock at any time during the day just because the stock is lower? No, he'll keep asking the floor broker who keeps giving him the order if there's more behind it. It could take days. But when the order is finished, most traders won't care about letting the specialist know, and now he'll participate on the clean up print. So how does this apply to "reading" the Specialist? It keeps the focus on what we really want to know: how the Specialist handles larger orders, not how the Specialist makes money for himself. The Specialist will always make money and unfortunately we can't use the same methods for ourselves. For those of you excited about the possibility of 'Open Book' on the NYSE forget it. Do you really think that an institution would give the Specialist a 200,000 share sell order if the whole world could see it? Or even 50,000 shares? No, the orders will just get smaller that's all. So actually we're not looking for much, just a typical pattern that the Specialist continues to exhibit when working a large order. Lets say the Specialist in ANN receives an order to buy 50,000 shares at the market, and he doesn't have a natural seller. What is his normal process? Well, if you knew beforehand that he had this order, and then watched what happened it would be easier to see, but unfortunately you'll have to work backwards and try to figure things out which will certainly take much more time. How does he start? Usually he'll start by flashing a decent bid of about 5,000 shares. It's a strong bid, but not enough to scare anyone away. If he gets some nibbles, he might up the ante and show 10,000 shares. As a daytrader, we get excited when we see this, but we need to think like an institution. If I was an institutional seller of ANN, I'd be more likely to react to a real bid than a tiny bid. That's what the Specialist is looking for. But if he can't lure one in, he'll have to just pick away, which means buying at the offers (Not many small orders will feel the need to sell 500 shares into such a strong bid). So the stock moves up slightly as different offers are taken, but how does the Specialist handle this? If he's accumulated 5,000 shares already does he sit tight with a 5,000 share bid at the original level? Does he replace with bid with a higher 2,000 share bid? Does he remove the bid altogether to make it seem like there's no support? You may have been watching the stock for the last hour, but will every trader catch that? Making the stock look weak is a common strategy. Instead of dropping the bid, it's actually more effective sometimes to show a weak bid, of say one or two hundred shares, as well as a strong offer one cent above it making it look like the stock is ready to fall. Not a bad way to attract sellers. Does the Specialist in your stock do this? How many times? What happened when sellers took out the weak bid? Where was the next bid? Where was stock being printed? Was it 5 cents below the weak bid? 10 cents? Some specialists will use the same amount every time. And unless the stock has just run up a lot already, he won't let the stock fall too much - remember his primary goal is to fill the order, not to get too cute about it's execution. He's still got more stock to buy, so he'll take all those panic sell orders and execute them at the same price. Eventually if there's no supply, the stock will move up. Does the Specialist use another 5,000 share bid, but up higher? Kind of obvious, huh? How about 3,400 shares - looks more like a stray order. Another 10,000 shares accumulated, time for the old 'weak bid' trick again. You get the point. The key is watching, and I mean really paying attention to what is going on so that you can get a good idea of the behavior of the Specialist when he has a large buyer and no sellers (or vice-versa). This could take an extremely long time, but could be well worth the effort. One last thing - some Specialists trade more than one stock (not the really big ones), and at times, their attention may be drawn to another situation. Sometimes they are out sick or on vacation (or out to lunch). Sometimes an institutional trader will tell them exactly what they want them to do as far as showing bids/offers that may make no sense to us watching the stock. It happens, and there's nothing we can do to change that. Just try to stick with what usually happens, not what happened last.
I was an OTC MM for about 10 years ending in the late 80's. Since then I have been strictly an investor. Since I have not been that up to date in MM rules I will only make statements that I feel fairly confident are still accurate regarding these activities. By and large most MM don't have a clue nor do they care to learn, about the fundamentals of the stocks they trade. They just try to make orderly markets. When dealing with BB stocks it is very easy for a MM to get trapped into being short in dealing in a fast moving market. Reason being; most of the MM's in this stock are what are called "wholesalers" this means they don't have retail brokers "working" the stocks. So they have to rely on what's known as the "call" from larger retail houses. If a "Big" retail firm like an E-trade calls up a market maker to purchase say 5,000 shares of a stock, they expect to get an "execution" from that market maker. If he turns them down, or only gives a partial then the "Big" firm will go to another MM. If this second MM "fills the order" then that "Big" firm has a moral obligation to continue to give future "business" in that stock to that MM who performed (his life blood). This will go on until he "fails" to perform and so on. Contrary to popular opinion the "Big" firms Do NOT neccessarily go to the "Low Offer" to fill a buy order (Or high bid for a sell). The "Go" to who they think will perform to fill the order and expect that MM to "match" the "low offer" in the case of a buy (bid in the case of a sell). Even though this MM might in fact be the "high bid" and not really want to sell any more. As a wholesaler he must perform or he will get a reputation as a "non-performer" with the "Big" houses and will cease getting "calls" which means he will soon go out of business. I mentioned above that this activity is very significant to BB stocks. I say this because most of the trades in these BB stocks are "unsolicited" and are done through discount houses, ergo "Big" firms. With the above groundwork laid, let me try to explain how market makers get short even if they like the Company; Lets say that a stock (shell) has been lying quietly at $.25 bid $.50 offered. A limit order comes into one of the MM's to Buy at $.50 for a thousand shares. Prior to this trade that MM may be "flat" (neither long or short any shares). He fill the order and is now short 1,000 shares. He may raise his bid hoping to find a seller to "flatten" out his position. But before he realizes it a wave of buyers have come in and cleared out all the $.50 offers. Now the stock is $.50 bid .75 offered. Here comes that "Big" firm he just sold the 1,000 shares to at .50 with another bid for 1000 at .75. He makes this print. Now he is short 2,000 at an average of .625. The market keeps moving and now its .75 bid 1.00 offered. Now he has to make a decision. Just like investors, MM Hate to take a loss. So 9 times out of 10 he will now sell 2000 at 1.00 making him short 4000 but with an average .81. At this time he would love to see a seller at .75 so he can cover his short and make a few bucks. But instead the market keeps moving up. Now it is 1.00 to 1.25 and here comes the buyer again at 1.25. He doesn't want to loose the call so now he needs to sell 4,000 at 1.25 to keep his break even point above the bid. Now he is short 8,000. Market moves up to 1.25 bid 1.50 offer here comes the buyer now he feels he must sell 8000 here because "stocks don't go up forever". Now he is short 16,000. And so on and so on. If the stock keeps moving up, before he realizes it he could be short 50k or 100k shares (depending how big his bank is). _________________________ Finally the market closes for the day and on paper he may look all right in that his "break even" price may be around the closing price. But now he has to figure out how to entice sellers so he can cover this short. It is important to note that if this happened to one MM it has probably happened to most all of them. Some ways MM's entice sellers; Run the stock up with a "tight spread" in a fast market, then "open" up the spread to slow down the buying interest. After it has "cooled off" for a little while lower the offer below the last trade right after a small piece trades on the offer then tighten the spread so that the sellers feel they can take a "quick profit" by "hitting the bid" on the tight spread. Once the selling starts the MM's will walk it down quickly by only making small prints on the way down with the tight spread. Another way is by running the stock up in the morning, averaging up their short then use the above technique to walk it down in the afternoon. Hopefully after doing this for several days, it will demoralize the buyers. The volume will dry up and the sellers will materialize thinking that the game is over. Contrary to popular opinion, MM usually Do Not Cover in Fast moving markets either Up or Down if they are short. They Short More. They usually try to cover after the frenzy is out of the market. There are many other techniques they use but the above are the most popular. This technique works about 9 times out of 10 particularly in a BB market. However that is because 9 out of 10 BB stocks are BS. Remember what I said above. Most MM's don't have a clue as to the value of a Company until they get trapped. If the Company has solid fundementals and a bright future. Then the stock will do very well. And the activity that caused the situation will prove to even help the future stock activity because it created an audience."
9:30-10 "The Opening Period" - subject of a lengthy book to discuss properly. Also known as "Amateur Hour" (due to preponderance of market orders from public being filled to the best advantage of Market Makers) 10-10:30 "Reversal Hour" - the pros generally try bring the market in, one way or another, the opposite direction to clean up their positions resulting from buying/selling to the public (e.g. strong first half hour => they are short, must bring stocks in to cover). If the market opens strong and they can't bring them in during this critical timeframe, then you could likely be looking at a "trending" day, which of course can be valuable to recognize early in the day. 10:30-2:00 Sometime in the next 60-90 minutes: "the mid-day doldrums" (usually) arrive. Flat trading during NYC lunch - daytraders typically give back a lot during this period, buyers out to lunch, trading ranges favor MM's. Good to avoid, many times. I often go out for a run during this period. [this usually happens, except on trend days... we often get flat and/or encourage our customers to avoid initiating new positions during the slow-moving, thin choppy doldrums period like we had Friday 5/25 - the second lowest-volume day of the year] 2:00-3:00 - a strong counter-trend move - a time when they let the so-called "Locals" (heavily-capitalized/leveraged/savvy market-makers in the Chicago futures pits) in the CME futures pits (OR, other evil market forces such as arbitragers, large hedge funds etc have their fun (scores settled, runs on the shorts, surprise counter-trend moves, etc). Often the futures will drag stocks around by the nose during this period. 3:00 The Bond market closes. A pivotal time - often if the Bonds close in stock's favor, the market will start to move more when the Bonds close. Or, the opposite. [after the Bonds close, there is often a big reaction in the stock market as funds make decisions to change their stock/bond weighting, arbitrage exposure, etc] 3:30-4:00 The "real" scores (large buy and sell orders) are settled. Professional buying/selling sets in; in many ways this period is "the real day" in the stock market. Institutional buy/sell orders have to get filled, so they have to stop nibbling/faking it, and get the job done. They heck with VWAP (Volume-Weighted Average Price), playing MM games, etc just BUY THOSE ISSUES (or sell). The big orders often show their true hand during this time period. [this happens frequently, although we haven't seen as much of it in 2001 as we did during the big selloff, and the preceeding Bull run].
This is the greatest threat to an early speculator. The world wants to lead you into a direction taken at face value. Until you pull back that curtain, you will never see the true reality of the path that they lead you down. For example, letâs assume a trader on the message board is screaming about a companyâs new product. This is not happening because he is so excited that the product will be great for mankind. He is doing so because he wants to attract interest so he can sell his shares at a better price. The message board poster wants to lead you down the path of excitement that you should buy into the stock for his benefit, not yours. Taking this to the broader sense, the market wants to show you one thing and hammer you with the opposite. The early stages of the speculator fall prey to these instances. They are not properly trading a system provided because there is no sense of reality and no sense of personality from within. Their trading is more akin to gambling. Henry Emery suggests that in gambling, one must win and one must lose. In speculation however, this is not so. A gambler "creates" risks in the market place with wrong assumptions and following opinions. A speculator "assumes" risks and responds accordingly. Unless we progress out of the early stage of accepting items at face value, the early speculator will cease to exist. Bernard Baruch has a great quote about speculation. He said "it is a dangerously addictive habit which involves an appeal for fortune, are often accompanied by delusional behavior and are dependent for success on the control of emotions. As an early speculator begins to pull back the curtains of obviousness and takes a deeper look at the market, he begins to see the world of market psychology. He realizes that traders are not experts in every field and even if they were, this has no bearing on the stock price itself. He realizes that a stock moves when supply outstrips demand and vice versa. This happens if enough traders believe the reports and findings, not because the product exists. Therefore, he reads the psychology behind the move and not necessarily the reason for the move. To this individual, the stock market is no longer a carnival of fools, with playful intentions and obvious deceptions. At least he is no longer apart of this crowed even if they still do exist. Understanding that what was once thought as simple manipulations and cons are now just normal parts of the game. The experienced traders do their job while the early speculators fall for tricks. Please realize that tricks are not illegal, but are simple happenings that are no different from the message board screamers. There is no difference in the guy that says this medical device is going to bring in millions trying to entice buyers and the Market Maker that flashes huge bids to try and show strong support at "x" price to entice buying. Even if there was, as long as we understand that they are trying to lead us down the "obvious" path and we can respond accordingly, then we have progressed out of the early speculator stage. We are still falling for "new" things seen and shown but we are developing a database of information and events that shield us from making mistakes by following the obvious path. We are observing the psychology of other market participants through price and volume and responding to our observations within that time frame. Normally this stage of speculation is still met with some profit resistance as a trader struggles through the application of emotion control. Emotion control is by far the biggest key to the end result as a successful trader.
Many novice traders may not be aware, but there is always at least one or two sectors of the market that is showing strength on any individual day. This is true even on days when the Dow is down several hundred points. This occurs due to the constant shift of institutional money from one sector to another. If money is rotated out of the tech and Internet stocks, it needs to go somewhere else-hence sector trading occurs. Some days there may be strength in the oil stocks, other days it may be the pharmaceutical stocks, and yet other days it is the tech stocks. But the point is that there is always going to be one or two sectors that are better to trade than others
Does fair value really matter? Having a formula in hand is nice, but from a traderâs perspective, what is important is when and where buy and sell programs may be triggered, moving the market one way or the other. Using a purely hypothetical example, if fair value is 8.50, the buy program premium level may be 10.80 and the sell program premium level may be 6.40. In other words, when the S&P futures are trading 10.80 above the cash index, they will be overvalued (or stocks will be undervalued) and program traders will buy stocks and sell stock index futures. Conversely, when the S&P futures are trading only 6.40 above the cash index, they will be undervalued (or stocks will be overvalued) and program traders will sell stocks and buy stock index futures. âFair value in and of itself is really irrelevant,â Camp says. âWhere the PREM, the difference between the S&P contract and the S&P 500 cash index, is trading above or below it is of some generic value. One way to know this is to plot the PREM on a five-minute bar chart and compare it to the fair value. I am just wondering where does one go to get all these datas
Stockkbroker thank you for the tape reading posts. I like it very much. The only thing I would like to know is it your personal experience as an institutional trader ? You mentioned something like Originally posted by DeeMan. Do you know a good book on this subject ?
CVS -$111 RLX gapped up on some good news and CVS opened down 50c, should be a good trade but this stock is too thick to make any real progress. Got filled at $29.65 at 9:38. Went as high as 80c , before 10000 offer came in at 74c, 50c print and 89000 offer came in at 50c. Got out at 45c. The stock is too thick and didn't want to go anywhere today. STR $328 The whole XNG sector was up and the stock opened down 50c. Bought it at 42c, at 9:39, the stock went up slowly without any downticks, stock went as high as $25.20, for 800 shares. offer dropped to 19c, and I put in a 19c stop. Got out at 10c and the stock kept going higher till about $25.50. Left 40c on the table. Should have gotten back in when bid stepped up to 19c. Oh well. S $10 Tried to get another RLX when the sector is still up and going higher, just got filled on 200 shares at $47.61 as the stocks was running higher, the stock hit 80c before coming in like CVS, got out at 69c, went as low as 50c before going back up for good. The stock is trading at $48.50 now. Another thick stock that wiggles a lot, but is a lot more tradable than CVS. GP $43 First time trading this CYC stock, the sector was ticking up. This is a slow mover, got in at $27.04 and the stock went as high as 20c and bid started getting hit at 15c, I got out. The stock went back to the fig. before coming back up, now trading at $27.50, a good, slow stock to trade. GSK $38 A very thin stock that didn't want to move today, even when DRG is ripping. Got in at 55c, at 10a.m. Decent bid stepped up to 55c, 60c, 65c, and bid started getting hit. Went as low as 64c and didn't do anything the rest of the day. TOY -$6 Could be a good play. The stock got hammered down even when RLX is still up and kicking. Tried to pick a bottom, and I got in after a decent size print at $20.00, got filled at 05c. Bid stepped up to 05c, 07c print, then 06c, and I didn't like the looks of things, and I got out, usually when a stock got hammered down like this and when sellers are done, the stock should rip. Sellers were not done, and the stock got hammered again. The stock made a low of $19.98 before going back up for good, missed the timing on this one, but I did the right thing by getting out once I realized sellers are not done. Ho! Ho! Ho! A gift open and I went a little conservative after what happened on Friday. Didn't make as much as I would like but it is good to get back on track even with a small win. I am up $300, by the way things are looking, I am probably going to take it easy for the rest of the day.