Market makers love the junior exploration stocks. They have the power to manipulate to some degree, creating a lot of unnecessary fear in the common traders mind. The uneducated investor needs to understand what takes place when you actually place those orders. Behind the scenes the market makers, good and bad, are watching every move.
First here are a few definitions taken from Investopedia:
Market Maker: A broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. This process takes place in mere seconds.
Specialist: A member of an exchange who acts as the market maker to facilitate the trading of a given stock…
Naked Shorting: The illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. However, some professional investors and hedge funds take advantage of loopholes in the rules to sell shares without making any attempt to borrow the stock.
Ghosting: An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. Ghosting is used by corrupt companies to affect stock prices so they can profit from the price movement.
Price Manipulation: The act of artificially inflating or deflating the price of a security. In most cases, manipulation is illegal. It is much easier to manipulate the share price of smaller companies, such as penny stocks, because they are not as closely watched by analysts as the medium- and large-sized firms.
Now a few things you should know about market makers:
A market make is not always trading with you and may trade against you creating a conflict of interest
A market maker can use hidden orders to avoid disclosing his real intention and to hide large volumes.
A market maker can use large fake order sizes to intimidate traders to run in the opposite direction. This is referred to as NITBB (no intention to buy bid) and NITSO (no intention to sell offer). For example if a market maker wants to run the stock down he will create a virtual institutional size ask putting fear in the traders that the stock is going down. The market maker will then fill his buys at the lower prices. The reverse may also be done.
A market maker may display a real size to show that liquidity is there to attract big interest
A market maker may use a fake order of a large size to hold the movement until he is done buying or selling his position.
A market maker can use his real identity or can hide behind an ECN (electronic communication network) depending on his intention. He can make an inside market on both sides and under different identities
Market makers may also trade back and forth among themselves, filling their own bids, creating a large decrease and spooking everyone who is uneducated into selling also.
The market maker (specialist) is granted various informational and trade execution advantages and has a lot of power. They can see everything. WHEN YOU ENTER A STOP LOSS ORDER THE MARKET MAKERS CAN SEE THEM! You may notice from time to time a stock hit a short term low and then move up again. Market makers will do everything in their power to hit the stop losses to build up more shares for their account if they believe the stock will rise again. A stop loss order becomes a market order when it is triggered. If the volume of the bids are low your stop loss will trigger a much lower sale price and bring the stock down with it (referred to as slippage).
Watching the trades go through you may sometimes notice very small executions. Some people believe, and remember this is just a theory, those small numbers could be the market maker signals to each other...
100 I need shares.
200 I need shares badly, but do not take the stock down.
300 Take the price down so I can load shares
400 Keep trading it sideways.
500 Gap the stock. This gap can be either up or down, depending on the direction of the 500 signal.
Market makers love the junior exploration stocks and they have a lot of power. Buy on the dips, don’t get emotional or be manipulated and if you must use stop losses be very careful. Buckle up and enjoy the ride. If you cannot stomach the ups and downs then buy a savings bond!
