"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."
"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
Thanks - this is very helpful. I wondered about all of this and if the MM was influencing the share price. It all makes sense and gives me a better read on how the share price is behaving in the short term.