So many people misunderstand MM's. It's unbelievable that people would risk hundreds of thousands of dollars using a trading mechanism they do not understand. And then blame the trading mechanism for problems while not understanding where buy/sell pressure comes from. Hint: it is traders, whales.
Most shareholders shares are held at brokerages. You signal to your broker your desire to buy or sell. The brokerage is required to hand the order off to the 'mm pool'. Any mm whose spread allows can perform the trade. MM's compete against each other, not US.
First and foremost, they are not investors or traders. They are merchants. They provide a service without which you couldn't trade. They facilitate trades. In their transactions, they are are never the 'owner' of a stock that they can sit on and sell at a higher price later. That is trading, and trading is illegal for mm's.
They provide a spread, which is their buy/sell range. The spread says that, if you wish to buy, and it is within their sell spread, they will try to find the shares for you. If they already have shares, they will sell them to you. If they don't, they may BORROW (not short) shares that are available for sale but outside their spread. (If it was within the spread, they wouldn't need to borrow them.) So, they borrow the shares to fill your order. Then they find shares to replace the borrowed ones. if anyone sells at market, they are on it instantly - those always fill immediately. The purchased shares are then given back to close the 'borrow'. If an MM doesn't close out all borrows on the same trading day, they MUST report to the SEC the 'failures to cover' twice monthly. That's the famous 'short report'. Not OUR shorts, but MM's shorts.
I'm purposely using the term borrow here, because that is their mode of operation. Borrow shares to fill buys then replace them.
Shorting, in the form investors, means YOU are shorting a company in the hopes that the price will drop, and you will get your purchase at the lower price. If the price doesn't drop, you have to buy them at the current price, even if it is higher than the original price. You lose money because you are buying shares at higher than they originally were. The brokerage (not the mm) holds your margin money to cover any such shortfall.
Lastly, the mm can only 'buy' shares that are within their 'buy' spread. They say how much they will pay for shares, and if you sell, they take the shares, even if they don't have an immediate buyer for them. Their spread is their guarantee - if you buy or sell within their spread, then they are obligated to take the trade, BUT they will take a 'transaction fee' from the sellers AND buyers. MM's work at 5 digits, while we work at 4. Those fractional pennies are their bread and butter. They NEVER make money on the share price changes because they don't OWN those shares. They are custodians of those shares, their NAME is not on those shares, and they can ONLY take their spread out of each trade.
Note that they don't care which direction the share price goes - they get their spread on every transaction, be it buy or sell. They do not make money on the sale of stocks like we do...it is illegal.
So, it isn't the mm's that manipulate the share price, it is traders. Many of us have standing buy and sell orders, good for 60 days, and if the share price gets to our limit, a trade takes place. It is TRADERS that control, the price, MM's have ABSOLUTELY nothing to do with it. It is simply habit to blame them, but what you should be wondering is what the whales are doing. They actually control the share price by having open orders for both buy and sell, often on the same stock. I've done that for years - it gets low enough, I'll buy more. If it gets high enough, I'll sell some. This is AUTOMATIC.
Oh, and naked shoring is illegal. You can't borrow shares that are not for sale. That is, you can't sell shares you don't have, and can't borrow from a seller.
On the subject of 'locking your shares'...you are doing the opposite. You are putting your shares up for sale at a high price, expecting that no one will pay that price. You are right, but if they are for sale, MM's can and will borrow them if needed to fill orders. And of course, there is an audit trail for EVERY TRANSACTION, so detecting 'illegal practices' would be a trivial thing, and there are already automatic 'trade checking' software to detect and prevent illegal practices. MM's are million dollar companies, and they would never permit their employees to harm the company by doing illegal activities that could get them fined out of business. Especially with penny stocks.
So, MM's can't borrow ANY stock UNLESS they have a buyer for them. Again, the TRADER controls that price, because a BUYER says he wants shares within the MM's spread, and the MM is OBLIGATED to fill that order, even if it means borrowing shares. And mm's can change their spread if they find a different mm is getting trades that they are missing. Each mm has its own spread. They can and are adjusted all day, as the orders flow in.
AI
