[RT] the Role of the Specialist, RealTraders Email List Archive

Thanks bearly,

Yes, the specialist had the advanced inside knowledge when the large Buy Orders and Sell orders were ahead of time, as they are on the floor, so they just had to join the group to make lots of money. This is what one insider, who had a son in training told me a couple of years ago, I wasn't aware that has changed over time.

Ian

--- On Sun, 11/9/08, bearlythere4444 <no_reply@xxxxxxxxxxs.com> wrote:
From: bearlythere4444 <no_reply@xxxxxxxxxxs.com>
Subject: [TimeandCycles] Re: Richard Ney on the Role of the Specialist
To: TimeandCycles@yahoogroups.com
Date: Sunday, November 9, 2008, 9:03 AM
Ian,

The specialist definitely had an advantage in the past, but it's 
greatly reduced (almost to the point of irrelevance) now.

I would say the advantage the specialist had in the past was not that 
he could "control" prices, but that he saw where prices were GOING to

go on a short term basis, and he positioned himself to take advantage 
of that.

Because the specialist was the only one who had access to the book, 
and because all trades had to take place in the presence of the 
specialist, the specialist was the only one who saw everyone else's
 
cards. He could see the buyers others couldn't, and when he saw 
buyers, he got long (ahead of other buyers and others who eventually 
saw the same trend). It didn't work the other way around - the 
specialist didn't decide in advance to send prices up. He wanted to 
make money, not control the stock direction. If the market forces 
were going to drive a stock down, he had no interest in standing in 
front of that, he just wanted to be along for the ride.

Additionally, since the big firms wanted the specialist to cooperate 
with them rather than use his advantage against them, firms would 
often give the specialist warning about big buy orders, inside 
information, etc.

As Francis points out, specialists firms are doing very poorly these 
days. Most trades don't even go through the NYSE anymore, so the 
specialist is not much of an obstacle. For a long time, firms have 
been able to take the juicy
 trades away to other exchanges and shut 
the specialist out. While the specialist in the old days might be 
offered the opportunity to participate (to keep him from getting even 
in the future), the role of the specialist has been so diminished 
that he is no longer feared and need not be included.

Additionally, in the past, specialists controlled a large part of the 
short term trading capital. Getting assignments of stocks was a plum 
(order ticket fees as well as being able the ability to decide on 
each trade whether to buy or sell ahead of the public), so it went to 
the most successful, influential floor firms.

In this day of 40-1 leverage and trillions in hedge funds, it is 
trivial to run over the specialist.

--- In TimeandCycles@yahoogroups.com, RajaCar <koesje1958@x..> wrote:
>
> http://w3.tribcsp.com/~fredj/ney.html
> Richard Ney on the Role
> 
> of the
 Specialist
> 
> 
> 
> by Michael Templain, a
> 
> fellow Bender 
> 
> 
> 
> Fred Jacquot, the big Bender, le Gros Ventre as it were, has asked
> 
> me to provide a better, if somewhat longer, explanation of the 
writings
> 
> of Richard Ney; a task I am happy to perform.
> 
> 
> 
> "The story is told that after he had been deported to Italy,
> 
> Lucky Luciano granted an interview in which he described a visit to 
the
> 
> floor of the New York Stock Exchange. When the operations of floor 
specialists
> 
> had been explained to him, he said, 'A terrible thing happened. I 
realized
> 
> I'd joined the wrong mob'" (1Ney, 8).
> 
> 
> 
> It was with these words that Richard Ney began his first of three
> 
> books on the nature of the New York Stock
 Exchange. Ney wrote over 
20 years
> 
> ago, a time when a 750 Dow was high and today's volumes were beyond 
imagining.
> 
> Some of his material is dated, and must be read in the light in 
which it
> 
> was written. But the main premise of his books is still true: that 
the specialist
> 
> exists not to ensure the free and orderly trade of stock in a 
particular
> 
> company, but to fatten upon the innocence and ignorance of the 
small investor.
> 
> 
> 
> The New York Stock Exchange is not an auction market (2Ney, 86), 
though
> 
> many investors still hold onto that image. It is a rigged market. 
Volume
> 
> is an effect of price. Prices are controlled absolutely by the 
specialists,
> 
> the 'market makers' in individual stocks. It was this discovery 
that led
> 
> Mr. Ney to eventually
 give us small investors a priceless gift: 
enlightenment.
> 
> 
> 
> "Studying the transactions in each stock, I became immediately
> 
> conscious that, on too many occasion to be a coincidence, a stock 
would
> 
> advance from its morning low and then, often during the afternoon, 
would
> 
> show an up-tick of a half-point or more on a large block of 
anywhere from
> 
> 1,500 to 5,000 or more shares. This transaction seemed to herald a 
transformation
> 
> in what was taking place, for immediately thereafter the stock 
would begin
> 
> to drop like Newton's apple. Before I could find out what caused 
this, another
> 
> question presented itself: What caused the same thing to happen at 
the low
> 
> point in that stock's decline? For it was also apparent that a 
block of
> 
> stock of the same
 size often appeared on a down-tick of a half-
point or
> 
> more, after which the stock quickly rallied. Together these two 
facts seemed
> 
> to give a stock's pattern continuity. At the end of several days of 
investigation,
> 
> I discovered that these transactions at the top and bottom of a 
stock's
> 
> price pattern were for the specialist's own account. ... Clod that 
I was,
> 
> I had at last recognized that, although the study of human nature 
may not
> 
> be fashionable among economists, it is never out of season" (2Ney,
> 
> 9).
> 
> 
> 
> The specialist is part of a system. First, he is part of that rare
> 
> fraternity of men who are all specialists in an exchange. It is a 
small
> 
> private club, to whose membership one can only be born. The 
specialists
> 
> of the Dow 30
 exhibit the spirit of 'all for one, and one for
all'. 
If one
> 
> of the 30 is having problems, the other 29 wait for him, before 
they move
> 
> onto their next agreed upon campaign (2Ney, 172). The rest of the 
specialists
> 
> take their lead from watching the Dow 30.
> 
> 
> 
> But the system is more extensive and more powerful than just the 
specialists.
> 
> The specialists are the heart of the exchange. The exchange, in 
turn, has
> 
> practical control of the major corporations, banks, insurance 
companies,
> 
> and brokerage houses in this country. These, in turn, influence 
news reporting
> 
> and the regulatory agencies.
> 
> 
> 
> ADVANTAGES OF BEING A SPECIALIST
> 
> 
> 
> The specialist has many advantages, many tools to use to pry dollars
> 
> from
 unsuspecting investors and mutual funds. Chief among these 
advantages
> 
> is his book. In his book he can see at a glance all the buy and 
sell orders
> 
> from the public and the funds. His book tells him of potentially 
massive
> 
> sales above and below his current price. This gives him a great 
advantage
> 
> when he is trading on his own investment and omnibus accounts.
> 
> 
> 
> Because of his book, the specialist sees shifts in trends long 
before
> 
> anyone else. This gives him a great advantage. The specialist will 
buy heavily
> 
> at the bottom of a slide (at wholesale) then advance prices and 
sell, at
> 
> heavy volume, at the peak of the rally (retail). He will then sell 
short
> 
> and take prices down. The turning points of a rally will be marked 
by heavly
> 
> volume in the
 Dow 30 (3Ney, 85-89).
> 
> 
> 
> When he desires he can even make large block trades without entering
> 
> them into his book. In this way the public is never made aware of 
those
> 
> trades. Should the specialist want to supply a buy or sell order 
from his
> 
> own accounts, rather than from public orders on book, he can and 
will do
> 
> so (1Ney, 156). Ney cites specific examples when his customers 
orders were
> 
> ignored while the specialist completed orders for his own accounts.
> 
> 
> 
> When serving as the market maker, the broker's broker, the 
specialist
> 
> trades from his Trading Account, which is to be used to service the 
needs
> 
> of the market. However, he also has Investment Accounts (plural). 
His Segregated
> 
> Investment Accounts put him directly into competition
 with every 
other investor
> 
> in his stock. The reason for he has segregated investment accounts 
is that
> 
> they enable him to convert regular income into long-term capital 
gains (1Ney,
> 
> 113).
> 
> 
> 
> In addition, he also trades on Omnibus accounts, taking orders from
> 
> a friendly bank on behalf of friends, family, and himself (1Ney, 
58). Although
> 
> he is not allowed to be both long and short in his Trading account, 
he can
> 
> take the opposite stance in his Investment or Omnibus accounts 
(3Ney, 130).
> 
> 
> 
> A Specialist will often not have any shares in his trading or 
omnibus
> 
> accounts. If public demand for shares suddenly increases, the 
Specialist
> 
> is more than happy to supply those shares to the public by short 
selling.
> 
> This, of
 course, forces the Specialist to take the price down soon 
thereafter,
> 
> so that he may cover his short sales at the lower price. Or, the 
Specialist
> 
> may sell from his Investment Accounts, establishing a middle or 
long term
> 
> high (1Ney, 61), and then take the price down. Whichever strategy 
he employs,
> 
> a large public demand for stock ultimately drives the price of that 
stock
> 
> down, not up.
> 
> 
> 
> Distribution of large amounts of stock can be done from the 
specialist's
> 
> trading account, usually as short sales. The trading account can 
then be
> 
> covered by transferring stock from the long-term investment 
accounts into
> 
> the trading account (1Ney, 64).
> 
> 
> 
> The existence of the specialist's Investment and Omnibus Accounts
> 
> is
 ultimately detrimental to the public. "In a stock with only a 
small
> 
> capitalization or floating supply, the segregation of large blocks 
into
> 
> long-term investment accounts for the specialist further decreases 
the supply
> 
> of the stock available to the public" (1Ney, 61)
> 
> 
> 
> The specialist has absolute control over price. He can match the 
buys
> 
> with the sells in any way he sees fit. He can raise the price of 
the stock
> 
> 3 points in three trades, and open the next day down 5.
> 
> 
> 
> The seeming unpredictability of stock prices is due to the fact that
> 
> prices exist at the whim of the specialist. A stock is only worth 
what the
> 
> specialist is willing to pay for it at the moment. The fluctuations 
you
> 
> see are, in fact, the evidence of how the
 specialist is working out 
his
> 
> inventory problems to meet his short-term, intermediate-term, and 
long-term
> 
> goals (2Ney, 172). The specialist will sometimes 'leap frog' his 
prices
> 
> up or down, creating a gap. This is done to keep a group of 
investors from
> 
> buying or selling at a particular price. 'Leap Frogs' show 
specialist intent. 
> 
> Read the whole article here:
> http://w3.tribcsp.com/~fredj/ney.html
>



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