EGOC Must Read Post from CEO: Really good stuff imho.
Re: Ask the Chairman
by RBrown » October 19th, 2011, 5:20 pm
@ALL
I keep getting asked if I am dumping shares. No! I am not! The next question is then, "Well who is whacking the bids then?" My answer is that its always retail - always - as retail does not know how to trade. Professionals do, and professionals do not hit bids (unless they are intentionally trying to drive the stock down, to cover, perhaps?). So, as I was a professional trader for 15+ years, even if you didn't believe that I'm not dumping stock, why on god's green earth would I hit bids? Particularly as I loth the very existence of bidwhackers.
At the mention of bidwhackers, I was reminded of something I wrote a long time ago (and once posted on my personal blog somewhere around 2004). It still holds true today. Enjoy!
On Bidwhackers:
First, allow me to define a BidWhacker: someone who sells shares by “hitting” the bid price of a stock. For NYSE, NASDAQ-NMS and AMEX companies, this is a fine and customary practice that represents business as usual. In anything else, and especially in small-cap deals, its just plain stupid, as it’s a quick way to ensure you get less money than you could and the stock price goes down. Sure its immediate gratification, but it usually involves selling large blocks that took several trades to acquire. Why buy 2,000 shares at a clip in a small-cap stock, accumulating 20,000 shares in a security that’s trading higher (or lower) when you ensure a declining value (or continued decline) by selling all 20,000 shares all at once – at the bid!? Your sale will undoubtedly whack a bid, meaning fill it and it goes away, leaving the next highest bid, but lower in price in its place.
In case anyone got lost in the above explanation (and I am sure there are a few IR guys out there who would be lost), let me remind everyone that a bid is not some random, computer generated number that market makers collectively agree upon and the beginning of each trading day and then update throughout the day based on volume and the ratio of buyers to sellers. No! Surprise, it is not that. A bid represents an unfilled order of a real person willing to buy a certain amount of that particular stock at a specified price, no higher. A cheapskate, if you will. Just as an ask represents an unfilled order of a real person willing to sell (offer) a certain amount of that particular stock at a specified price, no lower.
Back to the cheapskate. When you sell to his bid, the cheapskate buys up to the total number of shares that he agreed to purchase at that price – no higher and no more. If the number of shares you’re selling – at the bid – exceeds the order placed by the cheapskate, his order is filled and he goes away, leaving the next guy down on the totem pole. Point in fact: the next guy down was cheaper than the cheapskate, so how much stock do you think he’s going to buy from you? Probably not much as he knows that you’re a stupid BidWhacker, so he’ll only buy a little from you and go down in price and willingness to buy. Thus begins the slide in price. A perfectly fine trading day ruined all because you wanted instant gratification. Dumb BidWhacker.
Now let me tell you how you are losing money too. Assume a stock trading $1 by $1.10 that usually trades 250,000 shares a day. Not great, but there’s liquidity for the smart trader. Further assume that you own 25,000 – forget about the price you paid for it or if your Uncle Bob gave it to you as a birthday gift. The fact is that it’s worth $25,000 - $27,500. An important point to pick up on here is that it also represents 10% of the average trading volume in this security.
OK, so the Market’s open and you want a new car – time to sell. What do you do? If you’re a retched BidWhacker, you place a market order to sell all 25K. If you’re a sly, thoughtful or simple BidWhacker, you’ll place several market orders to sell 5K at a time. If you’re a fancy or dandy BidWhacker, you might even place limit orders to sell at $1, no less. Here’s the problem with all of those situations: the stock will go down! And I’m not talking about more sellers than buyers. It would go down if you were the ONLY seller and everyone else bought stock that day. The stock would still go down. Stupid BidWhacker! Remember the cheapskate? Well he’s only going to bid for 5,000 at a time. Don’t scratch your tiny-brained head on this one, BidWhacker. Just trust me. You see, Mr. Cheapskate didn’t get to where he is in life (has more money than you’ll ever know) by being dumb and buying everything you want to sell him at YOUR price. He’ll buy it at HIS price.
So lets suppose you didn’t listen to any of this and acted like the ignorant BidWhacker you’ve always been. If Mr. Cheapskate bought 5,000 shares from you on each trade and ONLY drops $0.05 each time, you will have sold all 25,000 shares from a starting point of $1 down to $0.80, filing that order and making it go away too. If you were the ONLY seller that day, the stock would close at $0.75 bid – down 25%. And believe me, you won’t be the only seller, so you can kiss that $22,500 that you think you might get. But even if you thought you could, why leave $5,000 on the table for Mr. Cheapskate to pick up? You left 18% behind – assuming you were the ONLY seller. Even you can understand that, right?Pathetic BidWhacker.
So how do you do it? How do you avoid the snickering in the locker room and ridicule from all your buddies who all own much more stock than you? How do you avoid Uncle Bob telling the cops about your little herb garden? USE A LIMIT ORDER ABOVE THE BID YOU DUMB TWIT. The counter part to Mr. Cheapskate is his brother, also Mr. Cheapskate, who is willing to SELL STOCK at a specified price, no lower. Join him! He sells stock every day. In the situation I described above he sells 125,000 shares at $1.10 every day of the week. If you join him, you’ll get $27,500 for your efforts. For the simple minded BidWhackers out there it looks like this: SELL 25,000 LIMIT $1.10. That’s not that hard, now is it? You might even try: SELL 25,000 LIMIT $1.08 if you’re in a hurry. You’ll be undercutting the brother of Mr. Cheapskate and will draw quick attention to the fact that you want out but don’t want to hurt anybody’s position. They will react quickly – trust me. And the added bonus is that you won’t wreck it for all your friends who also own the stock, because it might even trade higher. You Stupid BidWhacker!
Now go and repent. Think about what you have done. Amend your ways. BidWhacker!
*****
Side Note: The above being said, allow me to dispel another notion. Ther is no such thing as more buyers/sellers than sellers/buyers. Pick whichever one you want. Its crap, and impossible. In each transaction, there is a buyer and a seller. Period. If buyers and sellers are unmatched in price from one day to the next, that’s when you see price increase or decline. (Or there's an idiot BidWhacker in the deal.) But there will always be an even number of buys to sells. Otherwise you have bought from someone who doesn’t exist or sold to thin air. Think about it.
Its reminds me of the bit where boys, on average, lose their virginity at age 15 and girls at age 17. Think about it. What does that mean? It means that 17-year-old girls are sleeping with 15-year-old boys. They can’t do it by themselves, can they? Or, they are lying! There must be a match – in sex and in trading stocks.
AI
