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the Internet website for EDGAR is http://www.sec.gov/), the identity of the Ax will become obvious. Initially, the Ax may be identified by observing who very often "stops" price momentum in a stock. "Stopping momentum" in a stock means remaining at the offered price when the stock is moving up and conversely staying on the bid when the stock price appears to be dropping rapidly. The substantiality of a market maker's bid or offer is dependent on how much stock the market maker is willing to buy or sell. In general, it should be noted that an Ax may become irrelevant at times when the stock's momentum and volume are high because usually no single market maker is bigger than the market. Once the Ax in a stock has been identified, you may use this knowledge as one of the factors in making a trading decision. |
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In my earlier book I included a then very valuable chapter that rated market makers' significance relative to their impact on the price of the stocks they traded and identified those market makers that were just along for the ride. While there are still several significant firms that make meaningful markets in a multiplicity of stocks, it is much more difficult now to evaluate their impact because there are many ways to disguise one's influence in a stock. Orders can be placed through ECNs, and decoy market makers may be acting on behalf of the more significant players. In addition market makers of substance have merged or in other ways evolved into new entities that are harder to analyze. It is no secret that firms like Goldman Sachs, Morgan Stanley, Bear Stearns, Salomon, and Smith Barney are still names to be reckoned with. I find it more difficult, however, to really place the significance I once had on the impact of even these firms. |
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The Department of Justice and the SEC investigations have heightened the awareness of market makers concerning collusive behavior on the part of renegade traders. Therefore, any single firm's dominance without the involvement of friends seems unlikely. This will diminish the influence of any single market maker. Due to the new reality, I |
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