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Titan Pharmaceuticals Inc. Message Board

  • bolivarsam bolivarsam Feb 13, 2013 10:56 AM Flag

    Why MMs Short a Stock:

    "Let's say that a stock 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."

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    • "Some ways MM's entice sellers:
      1. Run the stock up with a "tight spread" in a fast market, then "open" up the
      spread to slow down the buying interest. After it has "cooled off" for a little
      while lower the offer below the last trade right after a small piece trades on
      the offer then tighten the spread so that the sellers feel they can take a
      "quick profit" by "hitting the bid" on the tight spread. Once the selling
      starts the MM's will walk it down quickly by only making small prints on the
      way down with the tight spread.

      2. Another way is by running the stock up in the morning, averaging up their
      short then use the above technique to walk it down in the afternoon. Hopefully,
      after doing this for several days, it will demoralize the buyers. The volume
      will dry up and the sellers will materialize thinking that the game is over.
      Contrary to popular opinion, MM usually Do Not Cover in Fast moving markets
      either Up or Down if they are short. They Short More. They usually try to cover
      after the frenzy is out of the market. There are many other techniques they use
      but the above are the most popular.

      These techniques work about 9 times out of 10 particularly in a BB market.
      However, that is because 9 out of 10 BB stocks are BS. Remember what I said
      above. Most MM's don't have a clue as to the value of a Company until they get
      trapped."

 
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