Paper - Market Dynamics (the unspoken secrets?)


Active member
This is part of a letter to another trader, slightly extended for this BB and published with approval of the recipient.


World markets are getting worse with every big company that reports in America. Strangely enough companies like ARM and PIC in UK have reported good results but ARM is on offer for little over 4 quid last night. That is amazing and yet, I think it will get even cheaper unless the market changes direction. Can you remember a bear market of such length. Nobody talks about the bear market but the reality is the market is not trending up. At best it is going sideways (FTSE 100) and at worst it is in a severe bear phase (Techs).

Some stocks like TWT are very bullish but they cannot go up because they need permission from America. I think if it continues over the pond eventually UK will break away temporarily from US trend and do our own thing. We saw this before in 1998. The FTSE 100 did this in early trade on Monday this week, bucking the trend in US on Friday 9/2.

After studying the behaviour of some stocks like BLM I am convinced that the SYSTEMS used by market makers to determine prices are configured to react to the major indices in UK and US. What I am suggesting is the systems used by MMs have an inbuilt sensitivity factor to take account of market direction, mainly UK indices, but as we all know FTSE 100/ TECHMARK takes its queue from DOW/NAZ respectively. This is because, if a MM marks up the share price in a falling market then it would induce massive selling. Traders with open positions would immediately take profits as the price increased because they would not believe in the rise and expect a fall tomorrow. PRICE RISE COULD NOT CONTINUE. Therefore the MM would go bankrupt, they cannot fight the market.

This has major implications for traders because the market is unpredictable due to high volatility factor and adverse news over night in America after the closing bell. Example: Nortel. Sometimes traders are fighting a losing battle against the trend.

I looked at every trade yesterday 16/2 for BLM at market close and buyers out-number sellers by a ratio of circa. 2:1 but the price went down. This is a common feature of market dynamics due to sentiment. I am mindful of traders bidding the price down and that is part of it but I still think the professional software used to determine a stock price has an inbuilt weighting factor which takes account of market indices. That weighting will depend on the sector it sits in. I have no evidence for this, the only evidence is observation on L2 and is therefore purely anecdotal. There is a huge silence in stock market magazines about how the MM software calculates a stock price. I believe that sofware suppliers to MMs may have to sign a confidentiality clause.

I think there must be a point when sustained and significant accumulation of a stock triggers a mechanism to mark up the price. Sort of critical mass. With FTSE 100 companies I suspect that the computer calculates income from investors capital plus profits from spread trading by MM so that the stock will always move in the right direction to take enough profit to be able to pay out big winners. For example when the city institutions buy a million VOD shares at £2.00 today they might hold for the long term until the price doubles, that is a serious amount of money. VOD has to pay this out many times over but of course it takes profit from the not so smart investor. This is a discussion I constantly have with myself and the answers are not obvious. Food for thought hey.

One thing of which I am absolutely certain , virtually nothing happens by chance. The news, the price and professional interest in a stock is not an accident, there is a short, medium and long term plan. That plan WILL of course take account of market conditions but the overall aims and objectives remain in place for each stock. The short term plan depends on market direction and I believe that MM will configure his price dynamic settings on a daily basis to fit with market sentiment. Some traders may reject this analysis as 'pie in the sky' but I ask members to think beyond a simple equation of BUYING versus SELLING. That is all too convenient and simplistic. If this was true then all traders would win all of the time. How many members have noticed that the price of a stock often rises when sellers outnumber buyers.

If anybody has the inside line on how the professional MM software determines direction of price or any other related point then please add your thoughts to this thread. Improved understanding = information = POWER to the trader.

An excellent, thought provoking article TX. Whatever rationale MM's have in determining prices, they certainly make sure they manipulate the market. For example Ultraframe - UTF - moved up yesterday, opened at 445.5 (Mid) and at 14:51 a buy of bid/offer 445/447 was logged, then at 15:11 another buy at 445/455 this being the last trade of the day. A five times increase in the spread!!!! Marketmakers making sure no one was making a profit on that one for the day. That surely had nothing to do with software. MM'S will use whatever is available to them to manipulate, be it sophiscated software, inside knowledge, nouse, or sheer greed.

Dont trust em, EVER !!!!


PS Who was the sucker who bought at 455????

[Edited by Uncle on 17-02-2001 at 02:14 PM]
Thank you for your interesting reply John, the $64,000 dollar question: Will the stock price rise or fall on monday? Was the MM locking in potential sellers or keeping out potential buyers? hmmmmmmm I wonder. I think you are 100% right that MMs will deploy every means at their disposal to take your hard earned corn. I have noticed that many penny stocks rise for two or three days to tempt in buyers then whipsaw to lock in traders. FACT: Most of these bottom liners that do not make a profit have no chance of trending up in this climate because they are unloved by market professionals, so the only way the MM can make money is trading off his own position to move price up a tick or two, tempt buyers, lock in buyers by reducing the price, then take profits when holders sell out to stop loss. Criminals! I hope that our young members who are just starting out take note of this advice. It could save you money one day. I would still invite comments on smart software theory.