The MagicianMagicians work by sleight of hand that distracts onlookers from the most important part of the trick. Have you seen the trick with a colouring book? First he will show you a 'book' with drawing outlines in black and white, then he will show you the same book with some pages coloured and then he will show you the book again with all the pages coloured.
Like magicians- who can't let the audience see how the trick is done- large equity traders, Fund Managers and Institutions often must hide their intentions, moving in and out of positions without signaling their plans to other market players. This is especially true of the Funds with highly visible roles such as Mutual Funds and Pension Plan managers whose moves are closely monitored and widely reported in the Financial Press.
Many Fund managers are now are now up with the best of the 'Magicians' often quietly entering or exiting large positions, distracting the market with signals in one sector or equity and appearing in a second one before anyone has realized what is going on. Such stealth is commonplace.
How do they achieve this? Some of them break up their trades into small orders and trade them direct through SETS or anonymous trading systems (Tradepoint).
In the SEAQ example of IMG the eight Market Makers all have prices which are quite close to each other. There are five Market Makers on the same spread of 385-395. One each at 383-393, 380-390 and one at 382-392. The interesting point is that they all have the same spread of 10p which is quite unusual as Market Makers tend to have different spreads. They are all quoting the same normal market size of 25x25 which shows that they are prepared to buy and sell the same quantity. It is quite often seen that these sizes will change and that they might be 20x25 or 25x20. If the sizes vary, it can be a signal as to the situation in the Market Makers books. A size of 20x25 generally means they have stock on their books as they are prepared to sell to you 25,000 shares but only buy from you only 20,000. Conversely a quote of 25x20 will show that they perhaps have a shortage of stock and are prepared to buy more from you than sell to you.
Why do Market Makers prices vary so much? In the example of IMG the actual spread of 10p is exactly the same for all Market Makers. And yet there is a differential in their pricing structure. Looking at the screen it would seem that the best company to buy from would be UBSW at 390 and yet they would be the worst company to sell through as you would only get 380. As a comparison the best person to sell through would be any one of the Market Makers on 385 and yet they are the most expensive to buy from. Often Market Makers move these prices around to deter and attract buyers. In UBSW's case they perhaps have existing high levels of stock and therefore are prepared to discount slightly their selling price to you to 390. They will deter sellers by keeping their price low at 380 hoping the sellers will go to another Market Maker. The other Market Makers on 385-395 could possibly have an opposite book with a shortage of shares and therefore they are trying to attract sellers to sell to them at 385, and by putting 395 to buy from are deterring buyers. This is obviously a generalization in this case, but this can be a useful tool to see what really is going on behind the scenes with Market Makers.
Market Makers will constantly change their prices, behind the scenes, and their movement in prices do not necessarily affect the bid /offer prices you see on your yellow strip. It is this movement behind the scenes that is useful information to an active buyer/seller who is able to gauge general sentiment and potential direction of the pricing prior to its actual physical movement on the yellow strip. On most stocks there are normally a "lead" Market Maker and often other Market Makers will tend to follow sheep like.
In the example of the SETS screens the very fact that a broker is able to post up a buying or selling price can lead to manipulation of the markets. And this is especially true around options expiry period when increased volatility is the norm and this, combined with a little bit of "sharp practice", can lead to way-out prices being posted at the top of the boards on very small quantities which can move the yellow strip substantially. The LSE does have a market-monitoring department, which does look constantly for unusual trade sizes or pricing.
Volatility is also especially high at times of demotion and promotion to the FTSE 100 indices when many companies are demoted and tracker funds therefore are forced to sell the underlying stock. For funds to dispose of such large lines of stock they generally tend to wait until the auction periods and this can lead to some very strange pricing action.
On the SETS screen it is also useful to follow the published volume sizes of each buy and sell in their columns. If there are a number of small volume buy and sells at the top of each column these can soon get taken out by a number of small buyers entering the market and therefore the prices can move substantially on small volumes. In the case of fund managers, many disguise their sizable positions by splitting their trades up into small quantities of 10,000, 25,000 etc. size trades.
This is only a very brief summary of some of the benefits of using Level 2 systems and ADVFN/Success Events will be holding evening seminars to help our customers further.