Interesting read
Reading Market-Makers Signals
See the signs and messages they send each other
Many traders believe that Market-Makers (MMs) will "signal" moves in advance buy using small amounts of buys or sells as "signals". The "signals" are from one MM to another.
100 I need shares.
200 I need shares badly, but do not take the stock down.
300 Take (or I am taking) the price down so I can load shares
400 Keep trading it sideways.
500 Gap the stock.
This is a theory put forth by a lot of penny stock and non-penny stock traders. This is not a guaranteed trading method but can lend some insight to communications. It can pay to watch a few MMs of your favorite stock over several days or weeks to see if they follow these or other similar signals. That way, you can divine what they are going to do and jump in ahead of any move that may come.
One simple reason... calling/emailing one or more of the other MMs and telling them to "take the price down" or "I am going to gap the stock" would be 100% ILLEGAL. Collusion at it's finest. If caught, handcuffs could replace their Rolex for a trip downtown.
We've worked on OTC/Agency (Nasdaq and OTC-BB) desks and worked with many actual MMs. We can attest that many MMs will use certain signals. Some will use fake bids/offers to trick individual investors and day traders. They are still responsible for those bids/offers and would have to buy or sell there if their bid or offer is hit, but they post those to make others think they have an order and do not really want to buy or sell there.
Fake signals - bids/offers: Taking Your Money Every Day!
An actual example of Fake Signals and how they scam you - with screenshots and charts showing the fake buy/sell offers can be seen in our article, "Free Penny Stock Sites: How They Make Big Money Off of Investors Without Them Knowing". rd
Our Next Article: Insider Trading: What it REALLY means when a CEO sells.
The Simple Truth
When a MM is at the bid or offer showing 100 for sell or purchase, in a majority of the cases, he or she does not have 100 (only) for sale. MMs are in the game to make money for themselves as well, while still executing orders for clients.
If you do see a huge bid or offer... tens of thousands of shares, or hundreds where it's not usual, these are the even shadier guys trying to make people think they have huge orders. Trust us, they don't. That bid or offer will disappear just before the price of the stock actually reaches there. Penny stocks are ripe with that type of dishonest manipulation. Perhaps, when we have a much money as Buffett, we'll watch for those - and hit that bid or offer for everything shown. Then wonder how they'll explain THAT to their manager.
They will almost never show their hand to let others know what order they are working. For instance, let's say a MM has an order, or know he will be getting an order to purchase 25,000 shares of a stock at $5.00. He will never bid for the full 25,000. He will place a 100 or 200 share bid at $5.00 or lower. Why? Simple. What if there is someone, possibly another MM hoping to sell 25,000 (or more). If the market maker places all 25,000 shares at the bid at $5.00, the seller can them immediately put the stock to him and the trade is over, all 25,000 at $5.00. With patience, he could have most certainly bought at least some of those shares below $5.00.
The MM with the bid will put up only 100-200 to see if any fish bite. If they do, he'll remember who sold him those and move his bid down to $4.95, $4.90, etc. and see if he can get more there. If he does, great, he'll keep working the price down as far as he can go to get the shares as cheaply as possible. Perhaps he now has 25,000 shares with an average price of $4.80. When his customer comes along with the order to buy the 25,000 shares at up to $5.00, he can then sell them to his customer at $4.90, or $5.00 for that matter. At $4.90, the customer is happy because he would have paid up to $5.00 and the MM is happy because he made $0.10 on each. NOW the broker can add his commission!
If the MM put up a bid for the full 25,000 , that would cause many MMs to lift their price higher. Why not? They see that somebody out there has a decent order and they want to sell at the highest price possible. That's why MMs will never post more than 100-200 share bids or offers unless they have a very large order.
Even if the MM would buy all 25,000 shares at $5.00, he'll still put only 100 to 200 shares on the bid. If someone offers him 2,000, he can accept that (he's only on the hook for the 100 or 200 he had listed) and close the trade if he wants.
Instances like this happen all of the time for many thousands of shares. MMs try their best to make money like that, but it doesn't always work. If that MM places too many shares at the bid, others will think he has a large order and they will move their sale (offer) price higher. In that case, either the buyer has to pay up, or the order won't go through and that MM has no chance at making any cash, and his broker has no chance at charging a commission. If it's an important customer who wanted to buy, maybe the manager tells the MM to GIVE the client shares (he goes short) and now he's at a loss.
If you do see a "real" market maker posting a large position, say 500 or more, there's usually plenty of more shares behind that. What we mean by a "real" MM is an actual NASDAQ member. In many cases, folks who place online orders through an online discount broker will place an order to buy or sell 500 shares or more. These will show with the firm's name, say "NITE" or "ISLD", who usually deal in online orders direct from clients. The market makers know this, so an order from ISLD at 500 shares will not move the market like an order showing for 500 from "RAJA" or Raymond James, if they make a market in that stock. In many cases, a 500 bid from ISLD or a similar place means just that... 500.
It can be fun to watch Level II quotes. If your broker makes them available for you, use them to watch the market makers and see what they are trying to do. Sometimes, you can guess right on what is happening.
For another quick example, let's say that a stock you are looking to buy has announced that they are repurchasing their own stock - and a lot of it. They'll use a brokerage firm, of course. Watching the Level II quotes may let you know who might have the order and what they are willing to pay. Let's say Raymond James (RAJA) has been bidding all week at $1.00, and almost never moved. They've been buying at that level all week. The next week, RAJA is nowhere to be found, but another broker is now bidding the same way. You can almost bank on it that the management is willing to pay at least $1.00 and will soak up almost any number of shares to keep the price there. They are also spreading around the order to several brokers to keep them happy. 99% of the time, they will be brokers who research that stock. The only way researchers get paid and make any money doing the research is by getting orders. Management will almost always send these orders to the firms that research them as a 'thank you' for the research (as long as it's positive). Buying those shares, if you already like that company, at $1.00 would make a nice bet as the company looks like they are willing to do what it takes to place a floor at $1.00 and keep that stock there or above.
Once you have your $1.00 shares, jump on the ask to sell. Chances are, the stock won't go lower through the day. Except at the end of the day as corporate repurchases cannot be made in the last half hour. This prevents them from trying to bid up and close the stock higher artificially.
How can you be sure it's that stock's order? If you see RAJA or others bidding for shares all day and that bid disappears at 3:30 ET, a half-hour before the trading day closes, you've found the broker - at least for that day or week.
AI
