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Uncle Joe's Story Is of Course Fiction. It Was Written Before I Discovered The Work of Richard Ney, But It Is Interesting That We Both Use The Same Analogy To Describe The

Uncle Joe manipulates the market for widgets by starting rumors that cause prices to fall rapidly. This panic causes many people to sell their widgets to Uncle Joe at low prices. Once he has stockpiled many widgets, Uncle Joe stops the rumors and prices return to normal levels, allowing him to sell widgets for large profits. The document discusses how some argue that market makers, who are licensed to buy and sell stocks, effectively manipulate markets in similar ways through their ability to see supply and demand and influence prices.

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52 views

Uncle Joe's Story Is of Course Fiction. It Was Written Before I Discovered The Work of Richard Ney, But It Is Interesting That We Both Use The Same Analogy To Describe The

Uncle Joe manipulates the market for widgets by starting rumors that cause prices to fall rapidly. This panic causes many people to sell their widgets to Uncle Joe at low prices. Once he has stockpiled many widgets, Uncle Joe stops the rumors and prices return to normal levels, allowing him to sell widgets for large profits. The document discusses how some argue that market makers, who are licensed to buy and sell stocks, effectively manipulate markets in similar ways through their ability to see supply and demand and influence prices.

Uploaded by

Bạn Hữu Nhà Đất
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

s they parted company, Uncle Joe chuckled to himself at

having such good fortune,


and such a helpful gossip for a neighbour.
Within days he had queues of customers outside his
warehouse doors, begging him to
buy back their widgets. With so many people selling, he
dropped his prices quickly,
making people even more desperate to sell before their
widgets became worthless!
As the prices fell further, more and more people cracked
under the pressure. Uncle
Joe was now buying back an enormous volume of widgets.
After several weeks the
panic selling was over, as few people had been brave enough
to hold out under the
pressure.
Uncle Joe could now start to sell widgets again at their old
levels from his
warehouse full of stock. He didn't mind if it was quiet for a
few months, as he has
made a great deal of money very quickly. He could afford to
take it easy. His
overhead expenses were covered and he could even pay his
staff a healthy bonus.
Everyone soon forgot how or where the rumours had started
and life returned to
normal.
Normal that is until Uncle Joe started thinking one day. I
wonder if we could do that
again?
Uncle Joe's story is of course fiction. It was written before I discovered the
work of
Richard Ney, but it is interesting that we both use the same analogy to
describe the
insiders, the specialists, or what most people call the market makers.
It is my view, (and of Richard Ney) that this is one of the great ironies of the
financial markets. Whilst insider dealing by individuals on the outside is
punished
with long prison sentences and heavy fines, those on the inside are actively
encouraged and licensed to do so. The problem for the exchanges and
governments
is that without the market makers, who are the wholesalers of the market and
provide a guarantee of execution of the stock, the market would cease to
function.
When we buy or sell in the cash market, our order will always be filled. This
is the
role of the market maker. They have no choice. It is their remit to fulfil all
orders,
both buying and selling and managing their order books, or their inventory
accordingly.
As Ney said himself, the market makers are wholesalers, nothing more,
nothing less.
They are professional traders. They are licensed and regulated and have been
approved to 'make a market' in the shares you wish to buy and sell. They are
usually
large international banking organisations, generally with thousands or tens of
thousands of employees worldwide.
Some of them will be household names, others you will never have heard of,
but
they all have one thing in common - they make vast amounts of money. What
places
the market maker in such a unique position, is their ability to see both sides
of the
market. In other words, the supply and demand. The inventory position if you
like.
Just like Uncle Joe, they also have another huge advantage which is to be
able to set
their prices accordingly. Now, I don't want you to run away with the idea that
the
entire stock market is rigged. It isn't. No single market maker could achieve
this on
their own
However, you do need to understand how they use windows of opportunity,
and a
variety of trading conditions to manipulate prices. They will use any, and
every
piece of news to move the prices, whether relevant or not. Have you ever
wondered
why markets move fast on world events which have no bearing. Why markets
move
lower on good news, and higher on bad news?
>T
he above explanation is a vast over simplification but the principle remains
true.
All the major exchanges such as the NYSE, AMEX and the NASDAQ have
specialists who act as market makers. These include firms such as Barclays
plc
(BARC) and Getco LLC that oversee the trading in shares and what is often
referred
to as The Big Board (shades of Jesse Livermore, perhaps). According to
Bloomberg
Business in 2012 ‘exchanges are experimenting with ways of
inducing market
makers to quote more aggressively to attract volume’. In
addition, in the same article
the US exchanges are very keen to increase the number of companies who
can act as
market makers. But, other than this, not much has changed since the days of
Richard
Ney.
Do these companies then work together? Of course they do! It goes without
saying.
Do they work in an overt way? No. What they will all see, is the balance of
supply
and demand in general across the markets and specifically in their own
stocks. If the

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