Something worth reading;
Posted by: Klonopin2mg2000
In reply to: Klonopin2mg2000 who wrote msg# 19130 Date:11/22/2006 3:31:33 PM
Post #of 19222
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Where's the Orderly in Market Makers - November 22, 2006
David Patch
While I typically refrain from addressing specific companies in these newsletters, today must be made an exception. Today, the evidence attacks the quality of the system itself.
As regulators waste precious time seeking alternatives to protecting the investing public while maintaining critical loopholes in the financial services operations, companies and investors continue to pay the price. In June the SEC presented the public with a concept to reform the short selling regulations once again with final consideration to evaluate the exemptions afforded member firms in bona fide market making activities.
Comment responses from such industry moguls as Knight Capital, one of the leading market makers of the NASDAQ, requested the SEC seriously consider doing nothing to stop the identified abuses stating:
"The elimination of the grandfather provision will lead to increased volatility in these securities, created by short squeezes as individuals attempt to cover positions. Importantly, the elimination-of the grandfather provision will negatively impact bonafide market making and the ability of market makers to provide liquidity."
This sentiment was repeated by each market participant commenting with each identifying the significance of bonafide market making in maintaining an efficient and less volatile market.
But how are words put into action in the real world?
Jag Media is a small developing company undergoing the financial struggles that accompany such public companies. It is not a Tier I public company by any stretch of the imagination. It is a public company however and with such comes public shareholders deserving of a safe and efficient marketplace to invest.
On August 30, 2006 my ETRADE account was hacked into and the perpetrator executed an 80,000 share market sell order for Jag Media. The stock at the time of the order placement was at $0.22/share but 72 seconds later, and 80,000 shares later the stock was reduced to $0.053/share. The 80% loss was not sustaining for the day but did change the market thereafter. The Bids and offers both fell based on a perception of a massive selloff in the security.
Knight Securities was a market maker in the stock that day in August but Knight was not market making. The firm did not step in and address this sudden, and out of character trade. Instead 5 consecutive trades were kicked off in a 72 second stretch as the Bid was systematically hit at $0.19, $0.16, $0.14, $0.14 and finally 53,000 shares at $0.053.
Regulators are aware of the breach to my account but regulators did not take a look at why a market maker did not prevent this out of character volatility.
Events like this continued over the months but escalated only this past week.
On November 20 more than 1 million shares were traded in a stock with a 3-month daily average of only 90,000 shares. On this day, buyers were lifting the Offer with purchases but the offer was not moving. With a previous day close of $0.25, the stock opened at $0.22 before over 200,000 shares traded at $0.25. Somebody or some firm was willing to take every buy order thrown at them never once attempting to seek a better deal.
By the end of this day the stock reported nearly 1 Million shares traded and closed at $0.32 with a high for the day reaching $0.35. The volume reported was far short of the total volume traded as over 200,000 shares (20%) were reported and cancelled throughout this day. The biggest block cancelled being for 75,000 shares.
And with such enthusiasm from the prior day, one could only wonder what November 21 would bring. Boy were the shareholders in for a shocker.
November started out with a bang as the pre-market box on the stock of $0.32 Bid X $0.35 Offer adjusted itself at the open to a $0.29 Bid X $0.32 Offer. With no trading at the open the first trades took place near 10:00 with 10,000 shares hitting the $0.29 Bid leveling both bid and offer into new and lower territories. Orders on the Offer quickly re-adjusted and within by 10:19 the stock was trading at $0.35 on 28,000 shares.
Then came the event that could only be described as the parting of the red sea.
Trades at $0.32, $0.31, and $0.29 and $0.30 came in succession and in a flash; with 8000.shares trading into the falling bid over a span of 90 seconds a final trade of 2500 shares dropped the stock to $0.12. The difference between the last trade at $0.30, on the offer, and the $0.12 trade was 0.11 seconds and 0.14 seconds for the last 3 trades.
Nearly 63% of the market cap was lost in fractions of a second on a $300.00 order only 2 hours into a trading day that followed a day in which more than 10 times volume traded on the buy side for much of the day.
Knight Securities once again appeared as a market maker in the box for Jag Media.
Where was the bona-fide market making that maintained order and reduced volatility?
The market reaction to this event was clear. The market makers parted the red sea and allowed one rogue trade to come in and alter the perception of the market. The once $0.31 Bid X $0.32 Offer just prior to the raid was quickly re-adjusted this time to $0.21 X $0.28 by the time the sea resumed it's normal state.
In response by the shareholders, another 300,000 shares traded over the course of the remaining 5 hours that the market was open. All 300,000 shares were being posted between the price range of $0.28 and $0.29 with most being entered on the up tick. In addition, more than 100,000 additional trades posted to the market but were cancelled for some inexplicable reason. Those trades as well were being posted between $0.28 and $0.29.
Suddenly there is a commitment to control volatility - more literally no volatility. The commitment dedicated to simply reduce buy side volatility by selling everything a buyer will buy at a constant market. The results of course being a 10% loss for the day on buy side volume.
And to close out this most bizarre week, November 22 could not be a disappointment either.
Market Makers shuffled bids and offers like this was Google but the shuffle was only reaction to 100 share and 100 share buys.
With the previous day again closing to buy side interests, the market sellers started early and with an opening Bid of $0.28 and Offer of $0.30 the market quickly collapsed to $0.25 Bid by $0.28 Offer after opening trades of 2970 shares at $0.30 and 100 shares at $0.28 were executed at 9:31. Imagine that 30 times more shares into the Bid than the Offer yet both collapse and collapse hard. By 9:58 it was now a $0.24 stock resting in a market represented by $0.21 Bid and $0.25 Offer.
Talk about volatility. No relative volume sells down a market and heavy volume can't pick it back up. sounds like a sellers market and sellers with special exemptions can make a mint in this game.
So the question here folks is simple. Where is this orderly market these market makers are creating that justifies special exemptions by the securities regulators? If the industry is claiming that the ability to sell what they do not have in inventory is a necessary tool to maintain order, how is it these same members do not uphold the responsibilities of maintaining a market on the down side?
The aforementioned trading is well documented and in the hands of the regulators as is the evidence of the account breach in which this stock was directly involved. How it will be handled will be as all other complaints are handled - slowly if at all. But there are tens of thousands of similar events (mini bear raids) that take place every year and go un-noticed or undocumented which is precisely the way Wall Street and regulators want it. They even put in public record that this is exactly how each wish the markets to operate.
Regulators rely on the people to do nothing. I suggest instead that you do everything necessary to protect your financial future which starts with a call to your regulator each time such abuse is witnessed. Become the squeaky wheel or suffer the consequences of a captured system willing to steal your future away from you
Have a Happy and Safe Holiday.
Under full disclosure: I continue to hold a position in Jag Media and do not recommend any individual buy or sell a position in this security without conducting their own due diligence.
