Oh, those market makers ... "The market makers don't want to let this baby run!" Market makers, or MMs, are the most evil people on the planet next to short sellers, according to message-board users. These are the professional traders who are responsible for organizing the buying and selling of stocks that trade on the Nasdaq Stock Market. They do this by posting a "bid" price at which they are willing to buy a stock, and an "ask" price at which they are willing to sell a stock. Nasdaq requires market makers to buy and sell at the bid and ask prices they post, and that helps to ensure that investors can buy and sell a stock if they need to. In the language of Wall Street, market makers are required to maintain an orderly market in the stocks they trade. One way market makers earn money is from the difference -- or spread -- between their bid and ask prices: If they are willing to buy for $10 and sell for $10.25, the 25-cent difference is their profit.
Many message-board users -- you'll find this most often on penny-stock boards -- believe that market makers conspire to keep the prices of some stocks down. Some go so far as to suggest that market makers themselves short stocks and then conspire to keep the price low so they can reap profits. Market makers do indeed short stocks. For instance, if an investor puts in an order to buy a stock and the market maker doesn't own any shares and can't find any other willing sellers, he or she will use a short sale to fill the buyer's order.
But the notion that market makers are involved in a plot to manipulate stocks in order to wring profits from their short-sale positions is a bit
far-fetched -- even for an industry that did face regulators' allegations of price fixing in the 1990s (market makers were accused of conspiring to bolster their profits by secretly agreeing to keep their spreads wide, and they ended up paying a huge settlement to resolve the matter). The idea that market makers would hold back the price of a stock that was in high demand is illogical. When faced with strong demand and lots of "buy" orders, surely the market marker could make much more money by buying shares, then selling them at higher and higher prices, than by trying to hold back a popular stock on which the market maker happens to be short. Indeed, market makers tend to avoid holding big positions in stocks, and they certainly don't try to get in the way of a moving market: At least when it comes to a stock that is listed on a major market, one market maker doesn't have enough money to stand in the way of all other investors in the market. There is a saying on Wall Street: "You can't fight the tape."
"Dishonest money dwindles away, but he who gathers money little by little makes it grow." Proverbs 13:11
