NYSE stock question/specialist

[dlincke]

Originally posted by Magna

Thanks for the further explanation. I guess I have trouble with this concept of specialists providing "fair auction market price" since they are the ones who get to set the price. So if a large seller comes in at market when there's no buyers, and the specialist is forced to become the "buyer of last resort" I've always seen them lower the bid dramatically so that they can buy in very low, then "work" the price back up (say, by showing large size on the bid + small size on the ask) just so they can quickly sell what they were "forced" to buy ... at a very handsome profit. So unless I'm missing something it's hard for me to think of them as "good guys" or "fair".

I think what you're missing is that trading on the NYSE is about more than just you and the specialist. It's not like the specialist participates in every print, the majority of prints are crosses between customer orders. And when you're talking about fairness in terms of price it has to be fair to both parties involved. When a large market order hits a dried up market and you havea bid or offer in on the opposite side your fill will be price improved accordingly.

Unless you're dealing with a rising market it's also often a better idea to bite the bullet and unload everything in one block since the price you get will usually be better than the average price you'd end up with if you tried to parcel it out. In addition the market impact of large orders in NYSE stocks tends to be much smaller than on Nasdaq stocks with similar liquidity because unlike MMs the specialist is bound by rules to provide an orderly market and can't simply switch into "I buy only 100 shares every half point" mode.

You can't be mad at the specialist for trying to buy low and sell high as long as he doesn't stretch his discretion beyond what constitutes an orderly market. After all just like you he's in this business to make money. But you can easily join him and profit from his moves. With many specialists you can tell beforehand when a large block is about to hit that will gap the price up or down. And with stocks that have the tendency to bounce consistently after such prints you can take advantage of it. RIG and BJS are examples where this works well as long as you only do it in alignment with the stock's and the OSX short-term trend.

 

[rtharp]

Take a look at every stock on the NYSE that has had a drop of 80-90%. Do you realize that the specialist was probably the buyer for 70% of that move and it is very possible that he is sitting on some huge losses.

That's the risk he has to take, but it doesn't happen often. The risk is absolutely huge but that is why a specialist is paid so well. You will also notice that when the sellers are finished a small bounce with a lot of size will happen. Guess who is trying to make some of his money back? Pretorian2 tries to play with him on these.

I'm doing the same but I like the opposite end of the spectrum. Look at stocks that have risen 80% with 15 up days in a row (I know there are none now but a few months ago there were). The specialist had to short that stock heavily on the huge upmove as very few sellers around. When the buying mania dies down he's going to gun it down to hit stops. It's how the market works. Going to the area of least resistance. Think of the market of energy just moving around. The specialist just flows with the energy and so do I

Rtharp

 

[rtharp]

Originally posted by qwiktrade





yes, it is true that if the specialist is forced to become the buyer of last resort, he will try to get the best price possible within NYSE guidelines.. generally, in a quickly falling stock the specialist is required to print at least some stock at each price interval on the way down.. once the sell order is filled, of course he will want to take the stock back up to where he can sell the shares he accumulated on the way down for a profit.. think of it this way, on the Nasdaq, market makers arent going to buy your shares while a stock is tanking.. since they arent buying your shares, they could care less how far the stock falls.. on the NYSE, you have one person controlling where the stock trades and this person is committing capital every level down.. i read somewhere about a trader that once had to go 17 points outside the inside market to get out of a falling Nasdaq stock.. that would never happen on the NYSE..


-qwik
[/B]

Qwik nice replies even though I didn't quote you on all. I just wanted to address the last one.

I will add one thing on above. NASDAQ market makers are required to post a 2 sided market since they are on the floor but again they can do it at their price. That's why we tend to drift towards whole #'s. They will buy a stock falling but group together and only each buy as little as they can get away with.

rtharp

 

[Magna]

qwiktrade, dlincke, rtharp, praetorian2, et al

Thanks guys for explaining and further discussing the ways of the specialists. I still lean towards trading Nas (mostly thru ECN's), because that's what I'm used to. But now I'm open to the possibility of trading those funny 1,2, and 3 letter stocks...