What makes things move?

[BBB]

Share price (only in theory) tends to follow the companies value not the other way around. The only way a companies value were to increase as a result of its share price is if the company is holding a large stake of its own shares.

Using a companies share price as a barometer of it's health is a mistake (in the short term). The emotions of the crowd (fear & greed) will take the share price way above and below what the company is deemed to be worth on paper. Think of the BMW example above. In time, that BMW will be seen as a classic car, and its value will start to appreciate. The car is the same car ( minus time value i.e. wear & tear). The only thing that has changed is our desire to own the car (led by our emotions) as we now see it to be a rare object and thus desirable. Same with share - they fluctuate in value depending on their availability in the market.

Trading/investing is really an exercise in merchandising. Nothing magical or mysterious about it really. The industry only makes us feel that way to justify charging huge commissions to transact on our behalf.

 

[strewthmate]

More questions

Yup, Blairlogie and everyone else who's posted answers I salute you. Wonderfully clear responses and analogies.

If you'll allow me I'll dip my toe in again:

So I believe I'm correct in saying that when you talk about a companies valuation - it is literally related to how much people estimate it to be worth. When people talk about millions being wiped off a companies valuation, they are really talking about what the share price values it at (in terms of the number of shares in issue/ price of shares etc). This I take it is entirely different (but not unrelated) to analysts recommendations of what a company is actually worth, which again is only a 'valuation'.

If thats right, its a good an advert for technical analysis as I can think of.

My next line of questions (maybe you'd like a breather first )relates to the dynamics of shareprice movements in terms of MM/ client interaction. My eventual aim is to come to some understanding as to how things like S/R levels impact of share price in relation to MM and the people buying/ selling.

But before I get there I'll start with the basics:

1. Thanks for your explanation of what might cause share price excitement, in terms of news etc. From what I understand (based on your excellent explanations) a 'share price' will rise when the touch price of spreads rises upwards.
This may be a "this will take a hundred pages question" but what would cause a MM to raise his bid/ offer prices?
2. Do MM have something like a shop window that says 1000 shares is currently this spread or do they change what they are offering based on how much someone ask for?

Looking at it you may be best answering 2 first.

Many many thanks again

PS Ever though of doing Darren Winters out of business Blairlogie

 

[Airthrey Capital]

Strewthmate,

I will answer question 2 first.

Within the City and the wider financial community, price information / quotes by marketmakers are disseminated in real time across electronic screens. These act as the marketmakers ' shop windows.

Almost every dealer in the city (could number 300 on a large London dealing floor of a major stockbroker / investment bank) will be sitting in front of a screen which displays live price information covering all sorts of instruments from equities, futures, options, currencies, commodities etc. Marketmakers prices can change every second, so it is vital that this information is real time.

In the history of Stock Exchanges, this is a relativeley new development in terms of displaying quotes. Prior to 1986, in London a physical Stock Exchange floor existed where all share dealing was physically carried out. Market makers were called "Jobbers", and they would run a book on individual shares. The brokers would buy and sell from the jobbers on behalf of their clients. Jobbing companies would have a booth on the stock exchamge floor, and a broker would approach his booth and ask "what are British Telecom?" The jobber might reply "200-205". The broker would then walk across the stock exchange floor and approach the booth of another jobber who was making a price in British Telecom and ask the same question, but get the reply ""202-207". The broker might have asked 4 different jobbers. All dealing took place face to face on the stock exchange floor. It could take 15 minutes just to get a share price. Trades were agreed verbally between brokers and jobbers, and recorded on paper (deal slips). Deals were not recorded and taped on the phone as they are today. Trading was done on trust (My word is my Bond), and any arguments / disputes settled over a beer in Jonathan's (stockbrokers favourite pub!) afterwards.

Apologies for the history lesson above, but it night help you understand what the electronic trading platforms and dealing systems post 1986 (Big Bang) are trying to replicate. It is alo amazing to note just what an incredible impact technology has had in the speed and volume of global equity trading in only 20 years.

Going back to your question, some markets are known as "quote driven" whilst others are "order driven". In other words in a quote driven system (such as SEAQ in London-somemone correct me please if I am wrong), market makers will adjust their prices to attract business to be done through them. In an order driven system (would that be SETS in London?..not sure), prices tend to move depending upon the actual orders / business coming through.

As ever, prices really move according to supply and demand. It's as simple as that.

 

[strewthmate]

Blairlogie

As a big picture thinker I find the history lessons very interesting, thanks.

Here's the next set of questions :-0

1. Am I correct in saying that a MM couldn't give two hoots whether a share price goes up or not as long as he's making money on the spread? (I suppose he'd have to be concerned about getting the direction right and judging pubic reaction so he can set his spread accordingly?)

2. Is it that share prices move a) when either a MM moves its spread to temp buyers/ Sellers - using tricks, I think there's something called tree shaking, and b) when news hits and there's a raft of punters which determine the spread MM trying to meet demand c) MM get wind of something and try and pre-empt public demand.

3. S/R levels seem to be very important at certain points in the movement of a share. Who is that determines the importance of these levels? I am correct in saying that it is a mixture of a) clients previous entry points, b) MM knowing it will be an important level because Eg Fidelity bought 1mil shares from them in ABC six months ago at this level. c)MM deciding what will be an important level.

4. What do the 'pros' use to trade. Do MMs used TA, or are they just playing a people game? When it gets manic do rules go out of the window and everyone follows everyone esle?

Hope thats not too much in one go

 

[Nildes]

You know how in court the lawyers always win because they still get paid win or lose?

The MM's always win because they trade the market up and down. They create a market..at a price.
The gap between the bid and the offer is their turf.

 

[strewthmate]

From what I've learned over the last few days (thanks guys)
Nildes that certainly seems to be the case.

Can anyone recommend a book on the antics of the MM and how it impacts share price.

Am I right in saying that level II on the Nasdaq for example displays what is going on in terms of the MM and that there’s usually one called the axeman who you can follow? From what I understand people like Alan Rich don’t use an incredible amount of charting and trade mainly using level II.

I’d really appreciate it if someone could have a look at my previous question which is in essence asking where charting fits in with what the MM are doing. Do brokers, Big clients and MM all use TA to larger or lesser degree?

Many thanks

 

[Airthrey Capital]

Generally speaking...

Equity marketmakers do not use TA...they simply run a book, and don't much care which direction prices go. As long as their book is well positioned and they are transacting plenty of volume business, they are happy to make money on the spread.

In the US, brokers and institutions do use TA for equities, but will also use a lot of fundamantal analysis, company visits etc. In the UK, TA is used for equities, but to a much lesser extent than in the US.

Obviously TA is paramaount both in US and UK for futures trading in currencies, indices, commodities etc.

Most institutions / brokers will have a team of research analysts who will examine the fundamentals of individual companies or sectors. Whilst there may be many of these analysts in a department, they may have only 1 technical analyst.

 

[Nildes]

My guess would be that MM's would need to be aware of TA but it is not crucial information.
Since they can make money whichever way the price moves then they only need to press the greed button or the fear button to get a reaction.
Although they can occasionally get tripped up by breaking news or by other MM's trading the same share, for the most part they only follow the general dictum of never giving a sucker an even break.

They are of course spawn of the devil spewed up from the nethermost pits of hell and its a cold day there when you get one up on them :cheesy:

I'm sure if we (the TA types) were all to favour the same MA's and stop-losses, they'd build that into their market strategy and fleece us all the more.
However, TA types, like beekeepers are pathologically incapable of agreeing with each other. Agreeing about what the right signs and correct entry and exit points are is entirely beyond us and tracking us would be like herding squirrels.
Maybe the MM's do it when its a slow day and they're bored?

 

[BBB]

Two points on level 2:

If you're at home on a DSL line - don't bother with it (if taking trading signals/trying to trade the spread). You need an industry strength connection to be equal terms with them as speed is the essence in hitting orders.

MM/institutional brokers are experienced guys and generally don't make their true intentions obvious - they appear as sellers when they are buyers, and as buyers when they intend to sell. They will start to buy in order to pull the market up, only to dump a huge amount of stock at a higher price than earlier. vise versa when they need to buy.

Blairlogies point above is quite important - they need volume to make their money. This is why your stops are run - most put their orders at the same old places (eg MACD crossover points, Fib numbers, supp/res etc). They push the market that way because they know there is a pool of orders there. They make their money (take yours), then move off somewhere else.

Good Luck!

 

[dewbpy]

Wow, this is really an intresting thread - I have learnt so much from 15 minutes of reading!

I do have a question though which popped into my head...

In order to find buyers for this new issue, ABC will appoint an Investment Bank (e.g Merrill Lynch) to handle this. Typically Merrill Lynch would "underwrite" the offer. In other words ML would give £100m to ABC plc, and (for a fat fee) would find buyers for their newly issued shares

OK, so ABC receive £100m to try and expand their business. Merrill Lynch are immediately £100m in debt but hope to cover their costs and profit by the trading of the shares.

But what happens if ABC make some silly mistakes and no-one wants the share and the price drops. ML now have a tonne of shares that aren't worth their original £100m - whats going to happen now?

Also, if the company in question, ABC has no link with the shares as they have been sold on (e.g. the BMW), why should the share price fluctuate on good/bad news of ABC. It feels as if there is an unwritten rule which says if a company does well, buy the shares because, and if it does bad sell them because.

Simon

 

[Nildes]

Too many questions for me to answer but I think Merrills would do the same as the Bookies do down at the dog track.
They would make sure that they spread the risk around the market and that the Directors of the new issue carried a substantial risk themselves.
OK they might hold some over time and occasionally get wrong-footed but nine times out of ten, they'd expect to make a fat profit from providing these services.
Blairlogie was probably oversimplifying things a bit to try and get the underlying principle across.

 

[mully]

I worked for the major IPO house in the UK.
Before any deal hit the public notice, we would have it covered by institutional demand already.

Roadshows would encourage that demand.

In certain issues we operated a "green shoe" to control the after market.

More recently we used "accelerated" book building were the institutions dictated the establishment of the price.

Of course, we had the right to pull an issue, if markets became so unfriendly.

However, Bought deals, where we acted as principal, carried potential risk between the buying of the deal and its selling in the secondary market.

 

[Airthrey Capital]

There are of course occasions when things don't go to plan, and the Investment Bank / Underwriter can be left with unwanted stock.

Although companies may wish to raise money for an IPO, sometimes companies which are already listed may wish to raise additional cash to raise funds by issuing new additional shares. The company may want to do this to finance an acquisition.

In 1987, Blue Arrow PLC was a listed company on the London Stock Exchange. Blue Arrow was a recruitment agency, then headed by a chap called Tony Berry who had high respect in the City.

Tony Berry wanted to his company to purchase Manpower, a US company which at the time was the world's largest recruitment agency, and many times bigger than Blue Arrow.

Blue Arrow's Tony Berry approached his 2 investment banks (UBS and Natwest), to arrange to raise the funds by isuing new shares, and finding institutional buyers of the new stock.

UBS and NatWest agreed to underwrite the stock, and arrange to place the new shares with various clients.

Unfortunately, the market was looking decidedly ropey, and UBS and NatWest failed to place the stock.

The big problem was that UBS publicly claimed that they had successfully placed the shares, when in fact they hadn't. Such deceipt meant that Blue Arrow shares were being kept artificially high, and shareholders were being kept from the truth.

The upshot was that various UBS and Natwest employees were arrested and taken to court.

They were found guilty in the first instannce. They then appealed and were set free on the grounds that the case was too complex for the jury to understand!

At the time it was the most expensive court case in UK history.