MM’s, Institutions and Retail
By now you know how I hate funnymentalist with their news and conspiracies. It is a real sad disease a trader gets by not wanting to truly learn. Instead they rely on drama and romantic notions about how markets move. It is a lot easier than looking for the truth. It is very hard when you’re fed by the media and lot of “gurus”. Regardless, we hope to correct some misconceptions and try to get you to understand the order of things. So here is my stab at it.
Market Maker Investopedia.com Definition
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.
The market makers play an important role in the secondary market as catalysts, particularly for enhancing stock liquidity and, therefore, for promoting long-term growth in the market.
Institutions Answer.com Definition
An institution that acts as the middleman between investors and firms raising funds. Often referred to as financial institutions. (banks, hedge funds, mutual funds, insurance companies)
Retail Investopedia.com Definition
Individual investors who buy and sell securities for their personal account, and not for another company or organization.
I am a retail investor. I am not a bank or a market maker. More than likely you are like me.
Market Makers provide liquidity. They posts bid/ask to facilitate the trade. Market Makers are required by law to provide the best bid/ask price for market orders. Since they also guarantee their prices for a certain quantity, they must honor it regardless if it is favorable for them or until that quantity they offered is consumed. They are responsible for matching buyer for every sell and a seller for every buy. And somehow, they are considered the bad guys. So when you aren’t getting filled at your price, it is because there is none available at that price. Enter the “Specialist”. The specialist is an MM, who takes your order and holds it until the price of the security matches your price. He tries to get you fair pricing and must address the customer’s orders prior to his own. Why do people think they are the bad guys again?
Institutions create trends
Between the institutions, market makers and retail…who gets the news first and who gets the news last? And who will make up the larger volume of trades between the three?
Market Makers and large Institutions get the news first, retail almost always gets them last. So who has a clue on how the market will move? But does this put the retail in a disadvantage? No!! Because Institutions make up the greater volume of buys and sells, they create the trend in the charts that you see. Retail generally follows the trend. Well save for the funnymental retail traders. They don’t really read the charts. They rely on news to react. The not so savvy retailer ends up buying at the top and selling at the bottom. So in order to set up the trades, institutions allow the market to go up and set up the distribution stages of the market by getting the retailers to buy while they sell. Why are they selling? Taking profits of course! And shorting the market. To set up the accumulation, Institution get the retail to sell while they buy. Why are they buying? To profit from their shorts and to buy low. The tech savvy trader and scalper always gets in the beginning of the move because they understand how the market moves. Because they see what the big boys are doing.