A Short Seller Manipulation Technique Used by OTC Market Makers
johnlux — November 10, 2012 — 10 Comments
:Nothing up my sleeve . . . .”
In the stock market, price is the best advertising.
A stock that is going up tends to create the belief that it will continue to go up, and thus demand is created.
Price gets attention. We see the change in price and the price chart as a guides for action.
Short squeezes – buying panics – are created by rapid upward price movement and so feed on themselves.
Now, if I told you that I, as a market maker, could drop the stock price in the face of consistent buying and so go short and create panic selling, you might find this to be new and rather electrifying information would you not? That’s why you are reading.
Market Maker Magic
Here is the simple and little known trick of market makers.
We start with the inside bid ask of the stock, let’s give a hypothetical market, $0.20 bid offered at $0.26, with the last sale being at $0.26.
Now of course this is not a real stock and I am not going to give you real history. Any close similarity between this delusional and fictional narrative and exactly what happened to a certain stock – yesterday – is simply a matter of total coincidence despite your swinish suspicions to the contrary.
A buy order for 10,000 is entered and instead of being executed at 0.26, the market makers made the sale at 0.259, so that the buy order actually dropped the price compared with the last sale of 0.26 – so the stock shows 10,000 shares traded on a down move – making the buy look like a sale.
About 10 minutes passes, and another buy order, this time for 20,000 shares is entered and that is executed at 0.258 – another down tick on another buy order!
So now the stock is down on 30,000 shares of buying only – no selling.
Folks, that is not normal supply and demand, is it? You would expect that on buy orders the stock would go up or at least stay the same, would you not?
The Market Maker at Work
Silly you.
If the market maker now goes and hits the bid of his competition, even for a small amount of stock, let us say 1,000 shares, the last sale is showing is now 0.20 and the stock is down 23% on heavy buying of 30,000 shares, but it looks like the stock is being dumped in a panic.
What is the effect of this false appearance on the market?
First, they buyers apparently have an immediate loss of 23%. Second, anyone with a buy order may hold off on buying to see where the stock stabilizes. If the company is trying to get people to buy the stock, as it has a right to do, it is going to be much harder to whip up enthusiasm as the stock looks like it is crashing.
Sellers, if they panic, will now come in and sell. In fact, the stock could be so demoralized that, hypothetically speaking, it could close at 0.14, down 46%, but again, this is only fictional, right?
Now if we were to check OTCShorteport.com to see what the volume of trading vs short selling looked like, we might find that half of the volume was short selling, theoretically speaking, of course. Presumably this would be by the market makers going short at 0.259 and 0.258 and elsewhere to push the price down. We would also find that half of the selling might be from long sellers who went into a panic, perhaps maybe.
Now again, all this is a merely fictional example, and I would never accuse my fellow market makers of doing anything this destructive just to make a fast buck. But it is the type of thing that I now get paid the big bucks to discover and combat.
Why? Consider what this means to the company. If the company had a $100 million market capitalization, reducing the price by 46% is a $46 million loss for the shareholders on a day when there was really nothing but buying in the stock.
If the company is selling stock to raise money, say $10 million, it means that it has to now pay stock with a value of $14.6 million to get the same money – a loss of $4.6 million.
And if the shorts are short ten million shares, they made 0.26 minus 0.14 or 0.12 per share or only $1,200,000 while the shareholders had a $46 million paper loss.
