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Hi John,
You raise an interesting question about manipulation by market makers or
specialist. Years ago in 1975 (when the Dow was "locked" under 1000), I was
trading the bid ask spread of Eastman Kodak and Dupont. My reason for
trading these two stocks were because they were represented by the same
specialist, and both were components of the DJIA. It was my desire to trade
based on what the specialist was doing. I reached this decision after
reading a book by Richard Ney "The Wall Street Gang" copyrighted in 1974.
In order to understand the specialists' practices, the investor must learn
to think of specialist as merchants who want to sell an inventory of stock
at retail price levels. When they clear their shelves of their inventory
they will seek to employ their profits to buy more merchandise at wholesale
price levels. It is fascinating to think of how a specialist will
accomplish this task. Yes I know that trading based on tape reading isn't
germane to this list, however that is the only way to determine what the
specialist is doing.
The average investor spends his days seeking stocks with sound growth
prospects while the specialist, operating more like an human machine, is
able to devote himself solely to the solution of his complex merchandising
problems. All of which are dependent on the simple fact that day in and
day out he is concerned only with adding to or distributing his inventory
in each of the stocks in which he is registered.
According to the NYSE well over half of all short selling is done by
specialist carrying out their functions of maintaining markets. The
importance of the short sale is of crucial importance to the specialist.
Implicit in the use of the short sale by specialist is the principle at the
root of the investors problems: the relationship between what the
specialist wants the public to do at the top of the market and what he
wants him to do at the bottom. What is good for the specialist is bad for
the investor and vice versa. It is important to remember that the
specialist has two trading accounts, his dealer account and his investment
account.
Most investors are aware of the specialist trading account, however unknown
to most investors is their "long-term segrated investment accounts". The
problem of these long term accounts is that it raises problems which go to
the heart of the specialist system. The specialist is permitted to trade
for his own account only when such trades affirmatively contribute to the
maintenance of a fair and orderly market. The problem is that the
specialist with a long term position now has a vested interest in seeing
that the stock rise in price. Another problem arises when the specialist
who maintains such long term accounts is required to sell stock to maintain
a fair and orderly market and has no stock in his trading account. Besides
the tax implications of a short term or long term capital gains, by owning
the stock in his investment account the specialist may sell short on a down
tick! If a specialist (or anyone else) owns the stock to be sold and
intends to deliver that stock 'as soon as possible without undue
inconvenience or expense', the sale of that stock is a long sale not
subject to the short sale up-tick rule.
The question you must ask yourself is: how can the specialist manipulate
the price to his advantage? The answer is to think of human nature and how
most traders (stock or commodity) have no control of their emotions. The
fastest way for the specialist to accumulate stock is to systematically hit
the bid and lower the price quickly, and the fastest way to distribute
stock is to systematically hit the ask. Most people don't buy because a
stock is dropping like a rock, nor do most people think of selling when the
price is taking off like a rocket. It is like a complicated 'GO' game, how
do you determine who is winning and who is losing?.
When I was reading the tape, and in particular watching the spread I was
able to fairly accurately judge where my two stocks were going and profit
accordingly. I stopped reading the tape in 1977 to start my own importing
business and therefore am unable to verify if the concept of the specialist
manipulating the price would of held up in time. Human nature being what it
is I highly suspect that it has.
The fact that futures are traded on open out cry, lead me in 1993 to start
trading again in the futures markets. I still think that stock prices are
manipulated for the benefit of the 'insiders'. I know that there are a lot
of people on this list that can not wait until we have an all electronic
pit, however I really have to question how honest will it be? I take a
certain amount of comfort that I can see real people flashing their buy and
sells on CNBC when they show the bond or ag pit. The open out cry to me, is
the most honest way to enter or exit a trade. Then again I am not trying to
get a few ticks out of a trade, and am willing to pay the price to the
locals for my execution.
Well I have taken longer than I wanted in answering your question, I hope
it was of some interest.
Have fun!
John Hayden
http://www.sente.net
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