SmallCap Trading Techniques

[I Like Bottom Fishing]

Who is Killing Our Market?

Market Commentary by Tom Allinder

Who is Killing Our Market?

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Hot Stocks...

The Best Promotions and Performers OCT 14 2008:

Russell Industries, Inc. (Pink Sheets: RUSL) is consolidating. The stock traded a whopping 154 million plus shares today and finished down .0002 for the day after hitting a high of .0015. The .0015 level represented a 7 1/2 bagger in two days!

Edgetech International (Pink Sheets: EGIL) closed this day up .0109 to close at .061 on volume of 670 thousand shares...

International Building Technologies Group, Inc. (OTCBB:INBG) announced today that based on the current ongoing audit of Wuhan Wufeng Machinery Manufacturing Company (“Machinery Company”), preliminary audited figures show that the Machinery Company’s assets are worth significantly more than anticipated and previously announced. Read the rest of the story here. The stock closed at .001, up .0003 on volume of over 2 million shares.

PetroHunter Energy Corporation (OTCBB: PHUN) was up .025 to close at .105 on volume of nearly 1.6 million shares.

Market Commentary by Tom Allinder

Who is Killing Our Market?

I am sure that Traders and Investors that have been around the microcap markets for a long time years noticed that the market has continued to weaken over the last two years. During this time, I have picked up a lot of opinions as to why the market is difficult these days. Several factors are to blame for the problems but one sticks out more than the others…

The Big Trading Firms are Gone

The OTCBB and Pink Sheets have essentially become driven by for what is all practical purposes an ECN market. ECN stands for Electronic Communications Network; it is an electronic system that attempts to eliminate the role of a third party in the execution of orders entered by an exchange market maker or an over-the-counter market maker, and permits such orders to be entirely or partly executed. An ECN connects major brokerages and individual traders so that they can trade directly between themselves without having to go through a middleman. While this sounds good in purpose, it has greatly eliminated liquidity in lower priced stocks. This is because there are no longer actual human market makers to participate in the market. This is what used to give the market liquidity it had in 2005 and before; the market makers were there to play too. Now they are gone. A number of the bigger brokers left the penny market in 2004 and 2005 due to huge losses in stocks and trading volume.

Fewer Players mean Bigger Spreads

Now that the OTCBB and Pink Sheets are just ECN markets and have little market maker involvement, it is only the traders making the market. Market makers are usually very good traders and their involvement meant that they could run an orderly market. That is actually part of the definition of a market maker; run an orderly market. Without them, you have a market in chaos. When the market makers were participating they were looking for small scalps and would go long or short depending on the order flow which they could see in advance. This gave the market the liquidity that produced returns well beyond what you could get in almost any other sort of trading.

Bid and Ask Spreads

Because of the lack of liquidity and rule changes and such over the last 2 years, the price quotes on the bid and ask are no longer tight even if there is good volume on the stock. When we had market maker involvement, a stock with good volume would be quoted to the nearest tenth of a penny or nearest 100th of a penny. Examples would be a stock trading at .20 with a bid of .199 and an ask of .20. When a buyer bought the stock they were not buying into a .01 or more spread. For sub penny stocks, they are now quoted in .0005 increments instead of .0001 increments. Sub pennies with good volume for example would be quoted at .005 with a bid of .0049 and the ask of .005. Now, typically, you have a bid of .0045 with an ask of .005. Once the sub penny stock moves above this level, you will typically see .005 bid by .006 ask. The buyer has to buy into a spread that is ten percent or greater. Another significant problem is that stocks that get good volume will advance in price increments too fast when buyers come in and decline too quickly when sellers come in. When we had advances in hundredths and thousandths, a stock could build momentum over a period of hours and days. This is a big problem that needs to be addressed. If the traders are making the market, they should be able to buy or sell at any price they want.

Novice Traders

Now that the market is run by traders, there are enough traders in the marketplace to occasionally have a market. This is short lived though due to the lack of confidence and price spreads. When a stock starts to rally, the rally is sold for a small profit. Often times traders will get in profit and sell on the bid side to get out with a small profit. Problem is though that only one or two will get out and the stock will collapse leaving the rest hung in the stock. If traders are going to make the market, they have to learn how to buy and how to sell stock. These days even experienced traders will dump on the bid for a small profit. This entire process ends up being an ever tightening circle of small profits and big losses. No one is going to trade a market whereby there are small rewards and huge risks.

What Can be Done?

Now that the problems are well known, what can we, as individuals do to fix the market?

First all, I am going to start a petition to the trading firms to get the price quotes back to hundredths and thousandths. We will need all the help we can get. Actually the most powerful entities that can affect change are the companies that are traded in the market place. CEOs need to understand the problem and I am sure there are many CEOs and management teams that do not understand the landscape of the market.

Traders need to understand that they can sell stock on the offer. Education of the traders is paramount to fixing the market as well.

I know this is an ambitious plan but we need to take it to the brokerage houses and the regulators. We need to be able to trade and invest in companies on the OTCBB and Pink Sheets with greater ease and confidence.

Any ideas? Please email me!

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This Is only my opinion posted here please due not buy or sale a stock base on my opinion. For practice or educational purp