Who's in control?

S

SHORTY

I have a lack of understanding of some market mechanics. Specifically, I would appreciate answers to a few of questions.

1) How much control over price can MMs and Specialists exert?

2) Can they control more than just interday blips and actually cause a stock to trend up or down on a daily or extended basis? (I understand supply/demand, but I'm wandering how they manipulate it and to what extent it goes on.)

3) Yesterday during the day end rally, how is it that at 3:30 everyone and anyone decides to drive the market up. How is it that everything suddenly moves in unison. Do all the retail buyers, MMs, Specialists, and institutional investors all of the sudden develop cosmic consciousness and act as a unified being?

4) A follow through to #3. How is it that sectors will move in unison? I understand that if a market bell-weather comes out with significant news, stocks within the same sector will tend to track. However, I've seen numerous cases where sectors move without any news. Do all market participants wake up that morning and suddenly think, gee, I'd like to buy financials today.

As you can see, I'm missing a part of the equation and need enlightened. This might be an obvious question to you, but I'm confused.
 
Shorty =)

there are alot of different viewpoints on this.. ill give you mine..

1.) - MM's and Specialists dont usually take positions in a stock except for the purpose of gaining the spread.. or in the case of an order imbalance, they are the buyers/sellers of last resort.. but their primary function is to buy at the bid and sell at the ask allowing the market to discover its own price.. that is not to say that they dont have a few tricks, especially when they are working a large order..

2.) - as i said, MM's dont generally take positions themselves.. they are in the moving business, not the storage business..

3.) - any number of things can cause the market to move.. yesterday we tested the NDX 200ma on the daily.. people buy and sell for all kinds of reasons.. some logical, some not.. but it doesnt matter.. the market went up because people were willing to pay higher prices..

4.) - this is one of those "a rising tide lifts all ships" sort of thing.. sector news is generally good or bad for the entire sector, and so they tend to trade together..


btw, its not important who is in control of the market.. what is important is that you are in control of yourself =)

-qwik
 
>1) How much control over price can
>MMs and Specialists exert?

Their limits are pretty much driven by the same things our are -- bankroll.

>Do all market participants wake up that
>morning and suddenly think, gee, I'd like
>to buy financials today.

I think AAAs answer about the monkeys pretty much sums it up.

For me, it helps my trading to simply release myself from all the 'why' questions and go with the flow. As soon as I start attempting to figure out whether it's "real" market action or "manipulation", my trading goes down the drain.

Now, like you I am naturally curious about the same sort of things you are asking, I just have to make sure that I don't let the answers and knowledge effect my trading.

JB
 
My take:

Traders speculate in different time frames (an "investor" is just a longer-term speculator), with varying degrees of interest, dependent on news, et al. At one extreme, when interest is high across all time frames, then you'll have a big up or down day. At the other extreme, when interest is low across time frames, prices will be essentially flat (other than the manipulations of those who have nothing better to do than fake out others).

Shorter-term speculators contribute volatility (liquidity) with minimal net effect on prices. Longer-term speculators have a larger net effect on prices. However, each group catalyzes reactions by the other, producing a lot of movement up and down on most days. Generally, you can gauge whose playing by comparing volatility and net price movement:

Flat: no one's playing except those who have no choice
Choppy/Small Moves: scalpers
Choppy/Bigger Moves: daytraders bread and butter
Mid-size Moves: more interday traders
Big Move: everyone's playing

So the closer you get (the smaller the time frame), the more opportunities there are (since you can take advantage of the poorer entries and exits made by longer-term traders), but the more difficult the trading becomes, requiring more expertise as well as optimal connections and equipment.
 
Only an opinion, I'm not in the business.

Specialists and market makers do make their money on the spread. They make more money on the spread when volumes are high in the security they trade. Therefore I believe they will take directional positions to move the market out of low activity trendless situations into trending high activity conditions. Their vested interest is served by generating volume. Once they get the train moving, there are plenty of others willing to supply the fuel so they can go back to trading the spread.
 
I have been trading for many years and still have trouble understanding rallies like late Wed. I would say that these moves are mostly futures driven at the start since thats where a moderate volume of buys can move the market considerably. I dont think that the institutions see the momentum and jump on for a 30 min trade. There are some things in life that will remain a mystery.

These late day runs are just interesting since many times the following day you see a large gap down, particularly in a weak market. Gee who would have known???

I always wonder why I see nyse stocks put through several 2k sells mixed in with some 100 sh buys and yet the bid goes up 20 cents or more. Thought that when more selling price should go down. :confused:
 
DeKamp, I have the same idea as you about traders trading in different time frames, for different reasons, and different sizes but something I don't understand is why the market gaps. Thursday morning the NAS gapped down 30 points. Several of the stocks I follow also gapped down. That means there was a lot of coordinated (happening for the same reason) after-hours trading going on. I haven't been able to figure out what causes it. Since the gap occured in several individual stocks as well as the market as a whole it seems to me that there must be only one reason that it occured. News, collusion? I don't know.
 
Hi Rigel - couple of followup thoughts:

- With respect to moves in the last 30 minutes, I'm actually least surprised by that, relative to all of the other times of the day or night: daytraders getting out of positions, interday traders establishing positions, institutions establishing positions while liquidity is still present, and at least 5 other such reasons I can think of for why a trendlet would persist into the close of the trading day (not to mention that this is documented in popular trading books, making it one of those self-fulfilling prophecies).

- I've personally been concentrating on index futures (and previously QQQ) with the thought in mind that if I can win that game consistently then trading individual stocks (and mixing in stock-specific news and info) will be much easier. In other words, since a large part of the movement of all stocks is due to the movement of the overall market, you've got a big edge if you're on top of overall market movement first. (I'm not talking about second by second leading of stocks by futures, but rather short and mid-term trends in the overall market.) With respect to WHY stocks move with the overall market (as measured by index futures), that occurs due to arbitrage, in which a well-defined stock index is directly tied to the known value of both the index futures and the corresponding stocks. Traders buy one and/or the other automatically when these don't match up. In other words, once one has introduced a vehicle for trading the overall market (such as S&P futures), it becomes possible to push all the S&P 500 stocks up and down in a surprisingly coordinated way.

I'm not sure if that addresses your question exactly - perhaps you had something more stock-specific in mind. Anyway, it never surprises me to see the index futures gap, and to have stocks follow, since one can't happen without the other.
 
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