i.“Market Manipulation” is an emotive term, and conjurors images of
shady deals and exploitation.Market
Makers are not elusive companies that appear then vanish overnight.Market Makers are duty bound to make a market and to meet the needs of
those they are responsible to (See 1d.) to this end they may try to influence
the market.
b.How Do Market Makers make their money?
i.Market Makers make money from buying shares at a lower price to which
they sell them.This is the
bid/offer spread.(See 4.)The more actively a share is traded the more money a Market Maker makes.
c.Surely a Market Maker raising/lowering the price on news/rumour without
any buying or selling is manipulating the market?
i.No, not really.If the
Market Maker was to keep the price steady on the release of news they would find
themselves with lots of buys or sells which they had no choice but to fulfil at
the screen price but before they could find matching orders (buys for sells,
sells for buys) they would have to change the price and they would then loose
money through market exposure.This
is bad for them and for us.(See
3.)
d.Why do Market Makers raise prices on Monday morning for shares tipped in
the Sunday press?
i.This is the same as question 2c, because the Market Maker needs to ensure
that there are enough sellers to fulfil the needs of the buyers responding to
the tips.
e.Suppose my screen shows all sells and the price is increasing, what is
the Market Maker doing?
i.An explanation of this phenomenon
is given for Tadpole, which very briefly shot up to 73p before settling back
comfortably to the 50p support level.The likeliest explanation is that the Market Maker had an
Institutional order to fill and no stock to fill it with (this trade would not
have shown up on peoples screen until somewhat later), under thier obligations
to create liquidity in the share the Market Maker is obliged to gather a stock
holding, only possible if they can encourage people to sell, which can be
achieved by raising the price. The order is likely to have been large enough to
be significantly outside the NMS thus allowing the Market Maker to gather a
fairly significant premium on the price (probably being some-where between 50p
and 73p allowing the Market Maker to offset gains against losses and still
profit). Once the order is filled and the market volumes return to thier
"normal" levels, so does the share price.
f.Do Market Makers ever lower prices to “panic” investors into selling,
sometimes called “shaking the tree”?
i.Yes, moving the price up,
encourages sells, moving it down also encourage sells, take another look at
Tadpole, in the first instance, the price was hiked way up despite the 50p
support level, but at 50p few of the people who got in between 20p and 45p are
going to sell (and look how many buyers there were still at 50p), the rise was
meteoric, smart money just ignored it as it only lasted about 2 hours, but what
was probably caught was huge investors who were in way before 20p and had
forgotten about it, now they want out. The Market Makers order gets filled, the
price settles back to a smart support level and volumes decrease, however the
Market Makers gets another order to fill, maybe not so big, maybe not so
prepared to pay the premium, but you also know that there are a lot of people
out there waiting to see if it's going to shoot up past the 50p support level
again or dip and if it dips they're going to sell now before it dips back
past their 100% profit level.
g.Surely delaying the posting of trades is Market Manipulation?
i.This was allowed as part of the
SETS trading system when institutional investors pointed out that with 100%
transparency, any other institutional investor would be able to trade against
that position which would put their client holdings in jeopardy.Further, with 100% transparency, if it could be seen that an
institutional investor was (for whatever reason) adjusting a large holding in a
particular company it could also scare private investors into selling or
alternatively encourage them to invest without doing thier own research. Both
scenarios lead to either over- or under-selling and an inaccurate reflection of
the company in the share price as a direct result.
i.Sometimes, usually at the request of the client (see 1e), this is mostly
done by increasing the bid/offer spread therefore discouraging trading
especially by day traders and also by marketing the clients shares to
institutions in the hope they will take up long term positions.
ii.By asking their client to reduce the number of news releases.
i.Do Market Makers encourage liquidity?
i.Yes, partly because they have a duty to their client to ensure an active
marking in their clients shares, and partly because they have a duty to their
shareholders, it is only through trading/liquidity that Market Makers make
money.
Disclaimer : Please note that these articles do not necessarily represent the views of UK
Share Net. The views expressed are those of the authors. The price of shares can go down
as well as up. No infringement of copyright is intended, any offending articles will be
removed as soon as possible when notified.
