In this paraphrase from a podcast from June 10, 2019, a former market maker talks about the first 15 minutes following the open of the New York session. Though some of this information might be a little dated, I’m typing it here (and might type a similar account as my next entry) because I want to use it to help me evaluate why Numerical Price Prediction works so well, and why it seems to be able to correctly gauge where markets are headed, even though knowledgeable guys like this former market maker suddenly find it extremely difficult to do so when they happen to leave their jobs and become retail traders themselves…
All of the orders from the overnight, from day, institutional, and retail traders—they’re all sort of lined up like horses at the gate right at the open.
So that first 15 minutes, there’s a lot of imbalances, there’s buy orders, there’s sell orders from all over the world, and the market makers and the specialists on the floor of the exchange (and now with the alternative exchanges and things like that) they’re trying to match up those orders.
So, there is a lot of back and forth, what we call chop. And that was the time that we really did take advantage of traders. It was a feeding frenzy for us.
If a stock gapped up before the open and everybody came running for it, we’d take it even higher because market makers can move a market premarket without having to buy a lot of stock—sometimes not even any at all. So, we can move a market up three, four, five dollars a share…then traders come in and start buying it…and we sell it to them with the high, and then the next thing you know, we pull the rug…they panic…we drop the price down, or hammer it down, and buy it back from traders all day.
That’s what I call the gap and trap. It’s a very, very lucrative thing for us. It’s why my boys would make four or five million dollars a month…because they would get the order flow from every brokerage firm—TD Ameritrade, E*Trade, Schwab—all that order flow just goes to these market makers.
And on penny stocks, there used to be thirty, forty market makers—but there were maybe four or five guys who had “The Call,” and The Call is the large institutional orders from the E*Trades and the Ameritrades, so they’d have all this retail buying coming in and their job was to take the other side of those trades. So, we have a huge number of orders coming in, and if you see a stock start to gap up in the morning…there’s a reason why it might start moving away before you even have a chance to buy it.
It’s because market makers need to fill your buy order, which means they need to sell that stock too. If E*Trade goes to them and says, “We have clients who want to buy XYZ,” and the market maker says, “Well, we don’t have any,” then E*Trade is just going to go to another market maker.
So, that’s why we call it “shorting to retail.” You short the stock to your retail clients, and in order to make money doing this, you have to short at higher prices and buy back cheaper.
Now we have a lot of machines and algorithms that perform that function, but the function is still the same. It’s still a business, and if you were selling low and buying back high, you’re going to be out of business in a day. So, our job was to move the market up…and you can move a market up before the bell rings by showing…you know…you go to a Level II screen, and you start showing bids to the market makers, and if they don’t have any orders there, they’ll just start moving away…and you can move the stock three or four bucks really easily. I used to do it all the time.
And you don’t even have to buy a share. A lot of people don’t know this. So, you’d go…you’d move a market up…you’d open it…and then you’d drive it even higher. So, you’d have a couple of market makers, and they’d work together, and they’d boost the price of the stock up at the open.
So, when people see price going up higher and higher, they get whipped up by the price. It’s very emotional for them. And that’s what we rely on. We’d just sit there, and they’d just come to us. They’re just foaming at the mouth to buy, and we used to have a saying, “When the ducks are quacking, feed ‘em!”
We just keep selling. And nine times out of ten, if it’s not a trend day in that stock, that order flow, or that buying pressure is going to ease up. So, as less buying comes in, we get a nice short position—a couple of hundred thousand shares, or even millions sometimes—then all we do is pull the bids.
We bid the stock up…we supported so we can sell it to traders at higher prices. A lot of people don’t know this. So, when that buying pressure stops, we’re like, “Oh, okay,” because we see all the orders. So, we go like, “Oh, the buying’s running out? Let’s pull the rug on these guys now.”
So then what we do, we start hammering the bids. You’ll see like a million shares on the Offer on the Level II, and that will scare the living daylights out of retail traders, because they don’t know how to read a Level II, or even what it is. They don’t know that they’re fake orders, or “spoofing” as they call it now, and we’ll drive the price down.
You know, we’ll hit a few bids, and if some buyers come in, we’ll wipe them out really fast. And then, we just cause a panic in that first 15 minutes. And then everybody just runs for the exits, and we’ll just sit and bid, and wait and buy it all back cheaper.
