How and why the MM's toy with ERBB and move stocks the way that they do...
Using Level 2 for your buy strategy?
I can't tell you enough how INCORRECT this is.
For example, a trader is ready to open a long (buy) position in ERBB. He or she goes to their level II display and notices that there are maybe 8-9 MM's sitting on the bid with large numbers.
The trader thinks "ok I've got support (many offers to buy), and the AX MM on my side, this is a good time to BUY."
They receive their buy confirmation for the purchase of ERBB and a few seconds later the stock starts to fall. All the big boys have left the bid (buy) and are now on the ask (sell). The stock is dropping fast and the trader feels panic taking over. They wonder how this could happen with all the bid support they had upon entering their position in ERBB. Well, they've just been had. Welcome to loser day trading.
Most of what you see in Level II is about "head faking" and hiding true intentions. In fact, it's the Market Makers job to cover their intentions (buying/selling) and to cause price movement in their favor for themselves and their clients. They use Level II for this purpose. That's their business. If a market maker has an order to buy 500,000 shares of ERBB, they're not going to sit on the bid all day. The whole world would see this and the bulls would bid the price up, knowing that the Market Maker would be a buyer.
Instead, they'll "hood wink" investors and play the game. They will go on the bid with a large size to push the price up a little, maybe even up tick (move their bid up one level) to push the price a little higher. All the while they're using an ECN to sell short the shares the unsuspecting trader is buying (thanks Mr. AX). Then they move to the sell (ask) side with large sized numbers to cause a mini panic.
In this case, the Market Maker, or Makers, (Market Manipulators), were showing a FALSE bid on Level II. Instead of wanting to BUY the ERBB, their intentions all along were to SELL the shares.
As the panic heightens and the stock drops, the MM will BUY BACK the shares they just sold you at a higher price pocketing the difference (this is called SELLING SHORT).
So, if the MM's are short in ERBB, they have millions of reasons to hold the stock PPS down until they can cover their position...then they can turn around and make money by letting the PPS run.
YOU WILL NOT SEE THEM BUYING BACK THE STOCK BECAUSE THEY WILL BE BUYING BACK THROUGH AN ECN. Very effective, and designed to profit off of traders that look for support and resistance on the Level II screen.
My one post of the day... The MM's have many tools at their disposal to manipulate the PPS structure...hope this helps explain a bit how it works.
"As iron sharpens iron, so does one sharpen another."
