IMPORTANT TERMS
Ax - one market maker that seems to control the supply/demand of a security or
stock
Convertible Debenture (CD) - Debenture which can be converted into stock at
the option of the holder and/or the issuer at a specified date in the future.
Because the buyer has the ability to convert the debenture into stock under
certain circumstances, the seller is able to borrow at a lower cost than if the
convertibility feature was not present.
ECN (Electronic Communication Network) - an electronic system that brings
buyers and sellers together for the electronic execution of trades. It
disseminates information to interested parties about the orders entered into the
network and allows these orders to be executed.
MM – market maker
S-8 - are paid out for services
SB-2 - are sold by company (Optional form for the registration of
securities to be sold to the public by small business issuers)
TOP 5 IMPORTANT MMs or wholesalers/retail (typically out of dilution):
NITE, GVRC SCHB, TDCM, GNET
Examples of wholesalers: HRZG, MASH, NITE, SHWD
Examples of ECNs: ARCA, BRUT, BTRD, INCA, ISLD, REDI
Top Dilutors (retailers): ACAP, AGIS, BAMM, BMIC, CHIG, CLYP, FANC, FRAN, JIMK, MAYF, PERT, SACM, UCAP, VERT, VFIN
Monthly share volume report is indicating the MMs and how many shares they bought/sold (it is a month delayed)
Important (on Level II)
1. to see who the players are
2. and who to watch for
Axes basically is main MM that is either supporting the bid or opposite (hitting the ask).It is the party who seems to be controlling the action in the stock.
Also when a stock is dumping S-8 shares he will be consistent on the ask. Once he jumps and starts supporting bid => S-8 close to being over => MM movement is big.The ax isn't always trading the stock in one direction or another. Sometime he is keeping it in a tight range. And sometime he is not there at all. Another ax may step forward, but there are times where there is no ax present doing anything of note.The point is the ax is the one to watch, closer than all other parties or MM’s.
When you learn to trade with the ax your odds greatly increase.
So how do we find the ax????????
The best way to find the ax is through familiarity of the stock. By taking the time to watch the stock trade via Level II the ax will usually become quite apparent. But since we want info now and not wait days to find out there’s a shortcut. It's no substitute for watching the action, but it can at least give you a lead on a few parties to watch closer than others or MMs. Key = Monthly Share Report!
Generally look at the top 3-6 spots on the report. I tend not to count wholesalers at all as market makers. I also don't count ECNs as any number of players can use an ECN (TRAC, DATA). I will also throw out retail ECNs like GVRC for similar reasons as just mentioned, and also since most of the traffic is retail. We are getting rid of unnecessary MMs. Plainly it just doesn't happen where a little guy is going to control a stock. So that’s why we narrow selection.
One, the ax is not static. On any given day any party can be an ax. Heck, there may be one ax in the morning and another in the afternoon and neither of them could be listed in the top ten of the monthly share volume report. If a big order comes onto the trading desk of a firm that doesn't do big volume in a certain name the firm will need to work that order. And if no one else is doing anything of consequence in the stock this new party will command the action.
An ax can easily use an ECN to hide much of their action. They can and will use fake outs.
IMPORTANT:
Keeping a keen eye on Level II will reveal these things.
Monthly Share Reports and Level II patters are the key.
Watch the Level II and they use monthly share volume for confirmation.
Example of an ax who is selling:
When the market is rallying, the stock has a hard time moving higher, seemingly hitting a wall every time. And every time the wall seems to have the same initials and yet, when the strength subsides, the stock has no trouble falling. And funny enough, the ax seems to be following the stock down. That’s where Level II comes into play. You have now found the missing link per se. You can see around the corner and start to see patterns.
MM AX is on ask - it means he is driving price down - not good for us because we are buying and not shorting the stock.
Example of MM supporting PPS stock northward:
Let’s say that a stock (shell) has been lying quietly at $.25 bid $.50 offered. A limit order comes into one of the MMs to buy at $.50 for a thousand shares. Prior to this trade that MM may be "flat" (neither long nor short any shares). He fills the order and is now short 1,000 shares. He may raise his bid hoping to find a seller to "flatten" out his position. But before he realizes it a wave of buyers have come in and cleared out all the $.50 offers. Now the stock is $.50 bid .75 offered. Here comes that "Big" firm he just sold the 1,000 shares to at .50 with another bid for 1000 at .75. He makes this print. Now he is short 2,000 at an average of .625. The market keeps moving and now its .75 bid 1.00 offered. Now he has to make a decision. Just like investors, MM Hate to take a loss. So 9 times out of 10 he will now sell 2000 at 1.00 making him short 4000 but with an average .81. At this time he would love to see a seller at .75 so he can cover his short and make a few but instead the market keeps moving up. Now it is 1.00 to 1.25 and here comes the buyer again at 1.25. He doesn't want to lose the call so now he needs to sell 4,000 at 1.25 to keep his break even point above the bid. Now he is short 8,000. Market moves up to 1.25 bid 1.50 offer here comes the buyer now he feels he must sell 8000 here because "stocks don't go up forever". Now he is short 16,000. And so on and so on. If the stock keeps moving up, before he realizes it he could be short 50k or 100k shares (depending how big his bank is). Finally the market closes for the day and on paper he may look all right in that his "break even" price may be around the closing price. But now he has to figure out how to entice sellers so he can cover this short. It is important to note that if this happened to one MM it has probably happened to most all of them.
