Trade Arbitrage
Rarely is there an occasion for me to trade a penny stock, but when I see pattern trade or situation that allows for a quick trade I will take it. The opportunity was for an entry at .205 a few days earlier based upon trade pattern forming on the chart and a "No Information" push by retail, a quiet company makes for an opportunity to build anticipation. This will end in tragedy as the anticipation will be for bad news eventually.
Anyways back to the arbitrage, this is an opportunity for an MM to take advantage of price difference. I set my exit right after my purchase for .31 a solid .105 per share payday if I guessed right. Historical volume tracking showed that my entire trade would be in the "groove" for an easy exit if need be. So here is the setup:
Best Bid .30 and the Best Ask .305
My offer was the Best Ask for a brief 3 or 4 minutes before other retail got impatient and under cut my ask with the .305
02/21/2014,12:36 PM,0.3 4000
02/21/2014,12:37 PM,0.305 5000
02/21/2014,12:41 PM,0.3 7000
02/21/2014,12:50 PM,0.303 7000
Often when asked how do MMs make their money the standard answer is they make it on the spread... Not True, it is only under certain circumstance that an MM gets such an opportunity to take advantage of the spread. Here in this case the spread wasn't huge but enough room for a "Price Improvement" transaction for a retail customer. Remember my exit was for .31 but other retail however were sucking up the volume at the top and undercutting the Ask. So I dropped my order to exit at the Bid which was supported well at .30.
The trading algo for the MM recognized the opportunity and did the following, it had an order from another customer willing to pay .305 per share and here I was willing to sell shares at .30. In this case the MM purchased my shares at .30 and then sold to the other customer at .303. Two things to note, the MM initializes the trade as a BUY of actual shares and then sells those shares because it already had a customer in que to buy at a higher price.
This type of arbitrage happens occasionally, mostly you see it surrounding a "Market Order" in those cases you have given a condition to really take advantage of the spread, this is a typical scream of "Manipulation" if you will. Bid gets hit and yet the size doesn't change and then a sale for the Ask goes off and no change in size occurs... what the hell happened?????
Novice trader placed a market order to sell shares, thus they will take whatever market that can be created. The MM buys the shares at Bid as it already has a customer that is willing to pay at the Ask in their Que. This leaves traders on the Best Bid and Ask screaming "Manipulation".... lol... No, chalk that up to poor order conditions set by a novice seller. What doesn't show on L2 is the increase in size for the Ask, because FINRA doesn't require immediate execution orders to be displayed. The MM already had the trade in their que for the Ask and was working it with this Market order.
In Reg SHO marking requirements these trades get marked "LONG" as you are the owner of shares and the MM is directly purchasing your shares at the initial leg of the transaction. A direct contrast to a typical Riskless Principle transaction that are typically sell short on the initial leg and buy shares on a separate leg of the same transaction.
So what were the skins for this trade:
I entered at $1449.18, I exited for $2082.46 a solid payday of $633.28 - $31.72 = $601.53.
The MM made $21 off my trade execution in arbitrage and a set fee through my broker who is charged a flat rate fee based upon volume.
My Broker got their $7 per trade commission for the trades, a total of $14. and a .005 fee for trading OTC securities below $1 the broker made $14.00 + $17.72 on my transaction, total $31.72
