Making the Market

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Making the Market

By: Trader Jack

Almost everything you have ever been told about the world's stock markets is probably wrong. Almost everything you have ever assumed about the world's stock markets is also probably wrong. You probably believe that share prices go up and down due to classic 'supply and demand' laws. You probably believe that over time, the world's stock markets will go up because of increased economic production, or inflationary pressures. You probably believe that your broker, though undoubtedly a parasite, makes his money reasonably fairly by charging you an honest declared spread between his bid and offer price. You might even be laboring under the delusion that 'fundamentals' or 'interest rates' drive price.

Wrong, wrong, wrong and wrong.

So where's the proof, I hear you cry. OK, here we go.

Markets are composed of players of all sizes (including you and me!), the largest of whom are 'Market Makers'; firms who have an obligation to quote a price on particular securities whatever the overall market is doing. Brave of them, I hear you think - imagine having to buy Enron as it plummeted. Surely they ended up with most of that worthless stock in their own portfolios? Er, no. So where did it go then? Patience, little investor.

Get something straight in your mind now - although these market makers would like you to think that they are simple 'middle men', buying from Fred and selling to Joe, while pocketing the spread between those two prices in an honest, upfront sort of way, the truth is rather more devious (not to mention complicated). The real tool that market makers use to create their own profits is embedded within that sentence. The spread. I hear you think, "I have no problem with them charging a fee for their service - everyone has to make a living, and it's only a few percent after all! ". Wrong again! The whole concept of a 'spread' allows a market maker to control the market in the same way that a shepherd controls a flock of witless sheep. Let me elaborate

How the Market should work

Imagine that a market really IS controlled by the laws of "supply and demand", and rises and falls due to the imbalance between external buyers and sellers (you and me) competing for, or shunning certain securities. In this wonderful la-la land, market makers really don't care what the market does, as they make their own money from the spread. And a nice profit is is too. But hang on - isn't there any way to make MORE money from these investing sheep? Of course there is.

How the Market really works

To lubricate their transactions, market makers need a supply, or inventory of the securities they support. This can either be real certificates, or via a process called 'stock lending' (don't worry about THAT one yet - it basically means they borrow stock or "pretend" they have it). Once you have an inventory of stock, and the concept of 'spread' (or 'edge'), a marvelous opportunity opens up. The average price at which a market maker accumulates a security and the average price at which he distributes it are going to be different. Add this to the fact that the market maker sets the price tick by tick, and boom! A license to print money. Observe closely, this is a good trick.

Let's play Chicken

I, as a market maker, decide (for no real reason, or perhaps because there has been some trivial news about them) that stock in ABC Corp is my plaything today. I don't have much of an inventory in that particular security, so what do I do? Mark up the price so external holders will sell me some? No. I mark the price DOWN. Oof. Some external parties see this as a buying opportunity, and as I am a market maker, I am obliged to sell them the security at the new, lower price, meaning I am even shorter on that security.

Sounds mad, doesn't it? But it doesn't matter, because I mark the price down again. And again. And I keep on doing it till I hit the stops of external parties who are long, but weak, or the limit orders of people who are short. As a market maker, I know where these stops and limits are. I own the book, after all.

Ordinary Joe Public mostly think the market follows the laws of supply and demand, follows trendlines or fibonaccis etc, which means they all tend to put their stops in similar places ('resistance' anyone? 'support'? That's right, it exists!). This is a game of chicken, really, and YOU will ALWAYS crack before ME (the market maker), because I can take the market to zero, or to the moon. You have to meet a margin call.

So now I am a market maker who has a LOT of supply of ABC Corp, which has fallen significantly in price. Looks like I'm holding a plum, doesn't it? What do I do next?

...That's right. I mark the price up. And I QUICKLY mark it up to the point at which the current price is ABOVE my average purchase price. So voila. I'm in profit. In a fairly big way. All I need to do now is unload this stock to you over a period of time at a price above my average, and I am rich. You, of course, sold it to me on the way down, and are regretting it because it is probably already way above where you exited (strange isn't it, how the market seems to 'hunt your stops', and then reverse?!) If I do this right (and it is an art form, for which successful brokers get paid multi-million dollar salaries), I create the illusion that the market is totally random, and is being driven by YOU, whereas I am simply a fee paid middleman, facilitating your activities. Even worse, I give you the vague impression that you are actually pretty good at it, and if you can only get your stops a little more accurate, you will stop losing money!

As I mark the price up, external parties start to worry they will miss out on this growth, and begin an ABC Corp buying frenzy, allowing me to unload. Everyone is happy. Most of the investing public are sitting on unrealized (imaginary) assets, while I am converting worthless shares into hard cash.

So, I have made a real, cash profit. You are sitting on an unrealized paper profit. We are all happy. Until I repeat the process and stop you out. Again. Are you getting the picture yet? In fact, once I have built a little momentum in a particular direction (long OR short) I can let you prolong it, settling simply for my spread profit. I know that eventually the run will peter out, and then I can force it the other way, easily dislodging those who took a position too near the end of that particular phase.

Let me paraphrase. When the market is zooming up madly, market makers are actually selling (usually stock they don't own!) in preparation for a subsequent managed fall, during which they can buy it back for less (i.e. make a profit). When it is crashing down, they are actually acquiring stock, in preparation for the process of selling it back to you at a higher price (i.e. make another profit).

Does it EVER behave according to supply and demand?For the answer to THAT question, you will need to consult the full version of this article at www.traders101.) com. Happy trading!

About The Author

Trader Jack is a staff writer at www.traders101.) com. This article may be reproduced on your website or newsletter as long as it is in full, and includes this courtesy notice and links.

Comments

Basic 27.02.2012. 08:16

How do you feel about a shy/quiet person making marketing as a career? Hello, I'm a shy/quiet person and I wanted to make marketing as a career. I kind of just feel into this degree in college so I wanted to make the most of it. I feel really intimated when comparing myself to outgoing people in marketing. I feel I can do it, however maybe I'm just living in a fantasy land? Any advice would be great. Thanks in advance.

Basic

Admin 27.02.2012. 08:16

If it's what you really want to do, then you can do it. Just try to have a backup plan as well, because being stuck in a boring or unsuccessful career isn't what you want.

For example, if you're a salesperson but you are also good at graphic art, those are two very different jobs, but both fall under marketing.

Also, as ANF said, product development is different than sales, too. A shy person like myself could be very good at product development, because all you need is an understanding of what the consumer wants, and how to provide it.

Admin

Mirvete Q 02.01.2007. 13:10

How to make succssesful marketing for computer sales? I work as salesand marketing assistant in a computer company.Lately, I see that the level of sailing is to low.Which is the better way to make marketing about this issue?
Thanks

Mirvete Q

Admin 02.01.2007. 13:10

gave a classifieds ads

Admin

monique 13.09.2006. 01:36

What does a career in marketing pretain to? I was thinking of making marketing my major in college. I need more information on what type of jobs would be available to me after I was done. I was also wondering if this is a good career path to go into?

monique

Admin 13.09.2006. 01:36

Marketing is a great choice. I am in sales. Commissioned sales reps have uncapped earning potential. Check out these links to learn more.

http://www.sfsu.edu/~mktgwww/career.htm
http://marketing.about.com/cs/marketingjobs/l/blcareerprofils.htm
http://marketing.about.com/od/exploremarketingcareers/l/aa052103a.htm

Admin

jlhb_phil1224 12.10.2007. 09:24

How can I possibly make a market demand curve graph on Excel? We have a project on Economics that's to be done on PowerPoint. One of those is making a market demand curve on Excel then putting it on our Presentation. But I seem to fumble with doing it. Excel just won't cooperate. How can I do it?

jlhb_phil1224

Admin 12.10.2007. 09:24

You can use the graphing tool within Powerpoint... it just isn't as versatile as Excel.

If the issue is you can't generate the graph in Excel, try using the PivotTable wizard... once you understand the interface, it can be as easy as drag & drop to build a graph like that.

If the issue is you've got the graph but can't import the spreadsheet into Powerpoint, you can always copy a screen snapshot to the clipboard (CNTRL-SHIFT-PRINT SCREEN), then paste it into a Powerpoint slide (probably followed by the cropping tool under the photo tools menu).

Good luck!

Admin

Christian Vaughan 16.01.2012. 20:22

What are types of news that tend to cause a rising market? This has to do with the stock market. Pleas list some types of news that make markets rise. Thanks to all

Christian Vaughan

Admin 16.01.2012. 20:22

Lower Unemployment

Stabilization in Europe

Increase in Consumer Spending

Admin

supliang 02.02.2007. 04:00

What are the main duties for a product marketing manager? I am just wondering about some following questions about the position of product marketing manager:
what are the differences between a general marketing plan and the marketing plan made by the product marketing manager?
I am talking about the ERP software product .
For example,do the marketing objectives contain only the finacial figures (which is in tune with traditional marketing theory)when a product marketing manager making marketing plan.

supliang

Admin 02.02.2007. 04:00

in the business I work in, the marketing managers are those that are responsible for analyzing the market needs. they take that information to the product marketing manager. the product marketing manager determines if there is a product that already exists that can serve the new need or if a new product must be developed. if a new one needs to be developed, the product marketing manager works with technical to develope the new product. after development, the product marketing manager and the marketing manager work together to develop the general marketing plan. it is usually led by and the decision making is given to the product marketing manager. but it's the marketing manager's duty to implement the marketing plan.

Admin

KnicksRback 30.01.2013. 01:59

What kinds of things do you learn in the field of marketing? What makes marketing so important and what kind of things would you be taught and learned as a marketing major?

KnicksRback

Admin 30.01.2013. 01:59

The reason that marketing is so important to businesses is that it is how you get customers. Clearly nobody is going to walk into your office and ask for whatever it is that you are selling unless they know that you are there and what you are selling. The way that you make sure that they do know is through marketing. All companies understand the need for marketing but most really don't understand what it is. Marketing is not the same as advertising or sales, it is much more involved than that. Largely marketing is about generating leads that can then be turned into sales.

Individuals with marketing degrees will generally enter into their professions through sales in some capacity, but they can easily work their way up through the ranks. Some of the positions you might land in with a marketing degree include those of marketing manager, product manager, sales manager, advertising manager, or public relations.

If you have a marketing degree, you might be able to enter into Internet marketing (although an Internet marketing degree, specifically, may be better suited toward that particular goal). You might be able to find a position working for a newspaper, or a magazine, just as much as you might be able to find a position working for a website, or for a manufacturing company, or for nearly any company that produces or sells a product.

Admin

Sammmiiii 08.05.2011. 19:46

Can i make good money marketing for a car company? So, i really love cars but i'm more business oriented and things like engineering don't really appeal to me. i know a lot about how engines work and how cars are built but the math stuff really isn't for me. About how much money can you make marketing for a company like bmw? or porsche? thanksss!

Sammmiiii

Admin 08.05.2011. 19:46

Manufactures hire consulting advertising agency's to conduct marketing functions as opposed to doing it in house. Your business acumen isn't that great either it would appear.

Admin

Meii 29.03.2009. 04:09

Is Marketing or Accounting a promising career? I've thought about going into business and making Marketing or Accounting one of my majors has crossed my mind. Could someone tell me the benefits and drawbacks to both of them as well as a range in salaries?

Meii

Admin 29.03.2009. 04:09

Marketing and Accounting can both be lucrative careers. For people with college degrees in accounting, starting salaries for small firms are in the $40K range. For larger firms (who typically hire students from better schools) the starting salaries can be in the $50K-60K range. However, you need a degree in accounting for almost any accounting job, or at least a certificate (Associates Degree) for even the lower-paying accounting jobs. For marketing, the degree requirement isn't so stringent... but then, "marketing" is a much bigger field than accounting. Don't fall for these scam companies, though, like the ones people are posting here. Your best bet is to get your degree, and then go to work for a large company with full-time employees and benefits, if you can. Your college can probably help you with finding a job, and doing paid/unpaid internships while in college can help you figure out what you like best. If you're good with math and like numbers better than you like people, go with accounting. If you like people better than numbers, I'd say go with marketing. I'm in sales and while I was decent at math, I'm better at relating to people. Also, marketing can turn into many different types of careers (sales, executive positions, marketing jobs, advertising, nonprofits, management, etc.), while if you go into accounting, you'll likely be more or less stuck in an accounting or finance career (CPA, financial planner, controller, Chief Financial Officer, accountant, actuary, etc.).

Admin

King 23.03.2012. 20:42

How can you make poetry profitable? I know poetry isn't a big money making market but I know its very popular so there must be some kind of way to make decent money doing it.ps.I heard writing poetry books isn't much profit at all if you gain money rather than losing it throughout the process

King

Admin 23.03.2012. 20:42

How do you create a market for poetry? Is that what you're asking?

Well, I suppose you have to find the value of it: I buy 20 to 40 books a year, when I buy books from poets I know, I buy two copies, one is to give away. I subscribe to some journals, I make a point of subscribing, especially, to those journals that publish my work, I am part of numerous poetry associations. I bring poets and writers to my area, I always tell people, when they ask, what is good about reading and writing poetry. I am a poetry community organizer. I lead workshops, I organize readings, I work on getting grants for and awarding grants to organizations that promote all arts.

Do I want my poetry to make money? It does, and I turn it back into poetry through various activities.

What are you doing?

Admin

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