What is a Form T-Trade?
There is much confusion and rumor regarding “T Trades” in the penny stock market. Nasdaq Pink Sheet stocks often close at a certain price and, within 3-10 minutes after the closing bell, will show a large final trade that gets labeled as an “after hours” trade. Simply put, this is an inaccurate description of that trade.
To understand how this trade works, one must understand the role of the market maker. The most frustrating aspect of investing in the pennies, is market maker manipulation of the stock price. Anyone that claims this manipulation doesn’t happen truly does not understand the OTC Market. Market makers are in place to “control” the price of a stock and, theoretically, to ensure that the market reacts properly to supply and demand for a certain stock.
Unfortunately, when large sums of money and a lack of regulation are involved, more often than not, there is manipulation that suits the needs of certain investors or the market makers themselves. After all, they are in business to make money as well. If the average investor is purchasing stocks in the OTC Market, that investor is truly at the mercy of the market makers involved in the purchase and sale of that security.
When researching this article, The response from the SEC defined a “Form T Trade” a “trade reporting form used by broker-dealer members of the Financial Industry Regulatory Authority, Inc. (FINRA) to report equity trades executed either in the OTC market or during extended hours trading. Recent amendments to FINRA rules will expand the types of situations in which Form T is to be used, but they are not yet in effect.” The response also recommended contacting FINRA. Notice the first portion of the response. “either in the OTC Market or…” Once again, it is confirmed by the SEC that ”after hours” trades do not exist in the Pinks.
FINRA was much less transparent in their response and essentially spewed the same limited information regarding T Trades that is available on their website. None of which, accurately reflects why these trades occur in the OTC Markets.
Trying to decipher the meaning of these trades with the limited information that is available on the subject led down several dark paths. Clearly, the average investor is not meant to understand the concept or its rules. Even more disconcerting is the second part of the SEC message “Recent amendments to FINRA rules will expand the types of situations in which Form T is to be used, but they are not yet in effect.” That means there is even less transparency about this mysterious T Trade.
After months of due diligence, there are a few poorly publicized uses for a T Trade. The most important factor here is that the only requirement of market makers by FINRA is that they must report all trades in a day. They are not required to do so when the actual trade occurs.
To avoid creating “an unbalanced market”, market makers often do not report certain trades during the day to the public and then use a T Trade not to “scare” investors into thinking a market for that stock is going in one direction or the other at the spurring of one large investor.
If a market maker wants to accumulate a large amount of a stock in one trading day, that market maker may actually not report any of the trades that occurred until the trading day has ended so as not to alert the market to the collection. This practice is completely legal under the FINRA rules of the OTC Markets so long as the trade is reported at the end of the day.
To execute a Market on Close” order, a market maker may have an order to purchase the stock at a certain price at the end of the trading day. This is the most unlikely scenario because it needs to be assured that someone selling the stock and someone buying that stock are agreeing upon a price. Simply put, this is more likely with insider buying and selling.
The T Trade that the public sees is nothing more than one or all of the above scenarios. The T Trade reported at the end of the day can be from one market maker or many involved market makers. It can be a single purchase price but is usually an average of all of the previously unreported purchases from that business day.
Penny stocks are an exciting and lucrative business. As most everyone will tell you, it is not for the weak of heart. There is definite money to be made in the OTC Markets and more penny stock millionaires are made every day. But the best way to win the game is to know the rules!
One additional fact surfaced about market makers while researching T Trades. Did you know that market makers are not required to honor their offer price? That is correct, because the OTC market is essentially a “best offer” market. If a buyer meets the asking price for a security, the market maker can, and often does, decide to rescind the offer, not sell the security and adjust the selling price.
Using Level 2 for your buy strategy?
For example, a trader is ready to open a long (buy) position. He or she goes to their level II display and notices that several big player MM’s all are on the inside bid with say 8 or 9 other participants, with large size.
The trader thinks "ok I've got support (many offers to buy), and the ax (NITE) (another term thrown around the internet…) on my side, this is a good time to BUY."
They receive their buy confirmation 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. 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, they're not going to sit on the bid all day. The whole world would see this and bid the price up, knowing that the market maker would be a buyer.
Instead, they'll play the game. Go on the bid with 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, for example INCA, to sell short the shares the unsuspecting trader is buying (thanks Mr. AX). Then they move to the sell (ask) side with large size to cause a mini panic.
In this case, the market maker or makers were showing a false bid on Level II. Instead of wanting to buy the stock they really wanted to sell the stock, which they were doing through INCA.
As the panic heightens and the stock drops, the market maker will buy back the shares they just sold you at a higher price pocketing the difference (this is called selling short).
You will not see them buying back the stock because they will be buying through an ECN. Very effective, and designed to profit off of traders that look for support and resistance on the Level II screen.
What does happen is a company who has Billions of share to dump, contracts a distribution market maker to dump and receive certain amounts of total funds for the dump, and the MM gets percentage bonuses for the amount dumped. They'll flash different amounts of share in the ask side. But if they flash it inside the bid side, just to manipulate the price, it's a federal crime. Distribution, clearing houses, MM's are watched all to closely to take chances, especially inside of penny stocks where delusion sends reports to the SEC on a constant basis.
Subject: Market Maker Manipulation
More evidence of Market Maker Manipulation in the OTCBB. Background: A veteran of 20 years as a Market Maker would seem to qualify this commentator as creditable. He's in private trading now, but has some definite conclusions regarding Market Maker Manipulation (MMM) and what must be done about it. He cites incidents of suspected manipulation in many stocks, based on the numbers.
For example, "First, one must ask themselves why do Market Makers get to hide in the OTCBB market, not revealing their short positions. This appears to be the main issue behind all of the problems. MMs should be required to hold a very limited amount of a short position (say 10%) which is not held by a paying customer/client." "When Market Makers have an infrastructure in place that allows them to cheat, they will cheat. When they are allowed to -- behind closed doors -- have a HUGE short position and are never made to balance their position in the reasonable short term, they will never correct their positions. Full disclosure of short positions in all OTCBB stocks should be REQUIRED just like it is with the other markets: NYSE, NASDAQ and AMEX."
"It is my honest opinion that there has been ample evidence of late that Market Makers are manipulating OTCBB stocks. I believe that the law of supply and demand should apply. When more buying occurs, a stock should go up. When more selling occurs a stock should go down. This does not seem to be occurring." "I shall give two examples where I have personally been affected by MM Manipulation.
The first company PPS closed at 3.9 cents, up .002. During a specific period, the PPS was around .08 cents. Since that time there has been approximately 89 million shares bought and 10 million shares sold. According to the laws of supply and demand the price should go UP. One might expect the stock to be around .11 or .12 cents if not more!" "After all, for every share sold nearly 9 were bought! Today the stock is nearly 40% down due to unfair trading by MM’s."
The second company PPS was at about 6 cents, dropped to about 3 cents, and closed at 3.5 cents. "Recent transactions show that during a specific time there were 14 million shares bought and around 2 million shares sold. For every share sold, around 7 have been bought. The stock has fallen unfairly from .065 to .035." "I still own around 280,000 shares. I am divulging my positions in these stocks so as to be open and honest. Shouldn't the trading community have the same right from the Market Makers? Shouldn't MM’s be required by the SEC to fully disclose their positions, both long and short?"
Comment: The evidence is admittedly anecdotal, because unless some repentant MM decides to spill his guts, no one has access to proof of MMM (Market Maker Manipulation), and the MM’s certainly want to keep it that way. But as the anecdotal evidence builds and the pattern evolves, what are reasonable and objective investors to conclude?
Please require the OTCBB Market Makers to operate with the same integrity demanded in the other markets that you enforce. The lack of enforcement is allowing manipulation not tolerated by your agency, in other markets. This is a clear unfairness to the investors, and should be rectified swiftly. It is not right for our (my) government to know about this problem, and be so slow to act. Same conduct & guidelines/requirements for the Market Makers should be employed and enforced across the markets. This should, and could be done without delay.
Market Maker FAQ's
2. Market Manipulation or doing their job?
a. Do Market Makers manipulate the market?
i. “Market Manipulation” is an emotive term, and conjures images of shady deals and exploitation. Market Makers are not elusive companies that appear then vanish overnight. Market Makers are duty bound to make a market and to meet the needs of those they are responsible to (See 1d.) to this end they may try to influence the market.
b. How Do Market Makers make their money?
i. Market Makers make money from buying shares at a lower price to which they sell them. This is the bid/offer spread. (See 4.) The more actively a share is traded the more money a Market Maker makes.
c. Surely a Market Maker raising/lowering the price on news/rumor without any buying or selling is manipulating the market?
i. No, not really. If the Market Maker was to keep the price steady on the release of news they would find themselves with lots of buys or sells which they had no choice but to fulfill at the screen price but before they could find matching orders (buys for sells, sells for buys) they would have to change the price and they would then loose money through market exposure. This is bad for them and for us. (See 3.)
d. Why do Market Makers raise prices on Monday morning for shares tipped in the Sunday press?
i. This is the same as question 2c, because the Market Maker needs to ensure that there are enough sellers to fulfill the needs of the buyers responding to the tips.
e. Suppose my screen shows all sells and the price is increasing, what is the Market Maker doing?
i. An explanation of this phenomenon is given in a company, which very briefly shot up to 73p before settling back comfortably to the 50p support level. The likeliest explanation is that the Market Maker had an Institutional order to fill and no stock to fill it with (this trade would not have shown up on peoples screen until somewhat later), under their obligations to create liquidity in the share the Market Maker is obliged to gather a stock holding, only possible if they can encourage people to sell, which can be achieved by raising the price. The order is likely to have been large enough to be significantly outside the NMS thus allowing the Market Maker to gather a fairly significant premium on the price (probably being some-where between 50p and 73p allowing the Market Maker to offset gains against losses and still profit). Once the order is filled and the market volumes return to their "normal" levels, so does the share price.
f. Do Market Makers ever lower prices to “panic” investors into selling, sometimes called “shaking the tree”?
i. Yes, moving the price up, encourages sells, moving it down also encourage sells, take another look at this specific company, in the first instance, the price was hiked way up despite the 50p support level, but at 50p few of the people who got in between 20p and 45p are going to sell (and look how many buyers there were still at 50p), the rise was meteoric, smart money just ignored it as it only lasted about 2 hours, but what was probably caught was huge investors who were in way before 20p and had forgotten about it, now they want out. The Market Makers order gets filled, the price settles back to a smart support level and volumes decrease, however the Market Makers gets another order to fill, maybe not so big, maybe not so prepared to pay the premium, but you also know that there are a lot of people out there waiting to see if it's going to shoot up past the 50p support level again or dip and if it dips they're going to sell now before it dips back past their 100% profit level.
g. Surely delaying the posting of trades is Market Manipulation?
i. This was allowed as part of the SETS trading system when institutional investors pointed out that with 100% transparency, any other institutional investor would be able to trade against that position which would put their client holdings in jeopardy. Further, with 100% transparency, if it could be seen that an institutional investor was (for whatever reason) adjusting a large holding in a particular company it could also scare private investors into selling or alternatively encourage them to invest without doing their own research. Both scenarios lead to either over- or under-selling and an inaccurate reflection of the company in the share price as a direct result.
h. Do Market Makers try to reduce volatility?
i. Sometimes, usually at the request of the client (see 1e), this is mostly done by increasing the bid/offer spread therefore discouraging trading especially by day traders and also by marketing the clients shares to institutions in the hope they will take up long term positions.
ii. By asking their client to reduce the number of news releases.
i. Do Market Makers encourage liquidity?
i. Yes, partly because they have a duty to their client to ensure an active marking in their clients shares, and partly because they have a duty to their shareholders, it is only through trading/liquidity that Market Makers make money.
j. How do Market Makers encourage liquidity?
i. Partly just by being there, by being the enabler to liquidity, they will always buy or sell shares if you want to.
ii. By narrowing spreads.
iii. By encouraging their client to produce news releases.
Listing of Some Retail Market Makers: Many of these MM’s have fallen by the wayside, as this information was provided some years ago…but you can get an idea how they work…how some have very special duties that they perform for their clients. For example, it is widely known that VFIN is used to short a stock, dump shares, and to drive the PPS down from the ASK side.
These are the market makers from very popular brokerage firms. They handle a lot of the order flow for small retail investors:
NITE - NITE
SCHB - Schwab
SBSH - Smith Barney
MLCO - Merrill Lynch
ETRD - ETRADE
GSCO - Goldman Sachs
JEFF
VERT
DOMS
VFIN
PERT
BKST
BNCH
This is the list that you really have to master because these are the MARKET MAKERS that handle promotions, insider transactions also S-8 and CD Transaction.
CD: means Convertible Debentures they are loans that come due and get sold into the market by the loaning company.
FANC: major S- 8 player: if there is an S- 8 on a Stock most likely he will be there on the ask until it dries up
HDSN: major CD Seller Handles a lot CD transactions.
VIEW: love when he’s on the bid
MAXM: one of the favorites: smart money more like a trader than market maker replaces GNLN for now.
CLYP: heavy seller if you see him on the bid it's unusual
SACM: love when he’s on the bid
ABLE: like it when he’s on the bid
ECN MARKET MAKERS ARCA (formally GNET): very active used by traders, market makers, any one can use ARCA you have to know what your are doing. If you have access to ARCA trading system you can use the ecn.
TRAC: owned by my track if you trade with my track you can use this to place your trade as a liquidity outlet same 4 data.
DATA: owned by my track same concept as GNET & TRAC
