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times. You can assume that they will not run for the hills when a few small orders come their way. |
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Perhaps the best or at least the most often used factor in analyzing a move is to check out who is behind the move, meaning which market makers are moving their quotations. Certain market makers seem to be more of a factor in certain stocks than others. The market makers that seem to be the biggest factors are usually the firms with the largest institutional clientele. Firms like Goldman Sachs, Salomon, Lehman, Bear Stearns, Morgan Stanley, and Merrill Lynch handle a great deal of large institutional order flow and are more likely to be "real" in a stock. Being real is a way of describing the probability that they will usually stay at a quoted price and trade rather than run away from their quoted market. These dealers many times have large orders in the stocks they trade, which make their markets real, or they at times will commit a good deal of "firm" capital to a position when trading a stock. |
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In contrast, most market-making firms very rarely desire to hold positions or commit firm capital and only look to get a piece of the action on the orders they can work against (known as "getting in between orders"). These firms get their orders in exchange for payment for order flow or soft-dollar arrangements to institutional and retail firms and then flip the shares for small fractional profits. Firms such as Mayer & Schweitzer, Herzog, Troster, and NITE are well-known trading houses that usually trade size only when they have an order in hand. They seldom commit capital to position trading and are usually not real factors in pricing (without an order in hand). They trade for the spread. |
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In all too many cases, a market maker is in a particular stock only in the hope of "catching an order," an order it can trade against. What I mean by "trade against" is that the market maker will quote a price for a stock based only on the premise that it can turn around and fill an order it already has in handrisklessly. If the market maker has a buy order, it can buy stock against that order knowing it can always sell that stock to its buyerrisklessly. Alternatively, |
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