Take a good look at the recent chart history---the run up from .06 to .25 and then the three or four days in the low .20s--then the last 2 days--
This is possibly what's happening---
Since I'm not that up to date in MM rules,, I will only make statements that I feel fairly confident are still accurate--- 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/PK stocks it is very easy for a MM to get "trapped" into being short--- 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 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,--(KATX)-- they expect to get an "execution" from that market maker. If he turns them down, or only gives a partial fill,, 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 (KATX) to that MM who performed. 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). They "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. ( This also where the term "BID_WHACKER" came from)selling on the bid--
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/PK stocks. I say this because most of the trades in these BB/PK stocks are "unsolicited" and are done through discount houses.
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 (KATX)) has been trading quietly at $.06 bid $.07 offered. A limit order comes into one of the MM's to Buy at $.07 for 25,000 shares. Prior to this trade, that MM may be "flat" (neither long or short any shares). He fills the order and is now short 25,000 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 $.07 offers. Now the stock is $.08 bid .09 offered. Here comes that "Big" firm he just sold the 25,000 shares to at .07 with another bid for 50,000 at .09. He makes this print. Now he is short 75,000 . The market keeps moving and now its .09 bid 095 offered. Now he has to make a decision.
Just like investors, MMs hate to take a loss. So 9 times out of 10 he will now sell 30,000 at .095 making him short 105,000. At this time he would love to see a seller so he can cover some of his short.
But instead the market keeps moving up. Now KATX is .095 to .10 and here comes the buyer again at .10 for another 50,000 He doesn't want to lose the call,,so now he is short 155,000. Market keeps moving up to finally reaching .22 bid .23 offer and here comes the "big" buyer again, as he has all the past couple weeks-- now he feels he must sell to him here because "stocks don't go up forever".
Finally the KATX peaks 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.
The above and below paragraph appears to be what went on in KATX as it tried the .22-.25 resistance over several days--
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,( as was done in KATX) it will demoralize the buyers. The volume will dry up as it did,, and the sellers will suddenly materialize out of the woodwork thinking that the game is over.
Contrary to popular opinion, MMs 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/PK market. However that is because 9 out of 10 BB/PK stocks are "BS".
Remember ---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, solid management and a bright future like KATX. Then the stock will do very well. And the activity that caused the situation like the past 2 days will prove to even help the future stock activity because it created an audience." and got rid of a lot of weak sisters and flippers---
JMHO ,, cheers, art
