:: Making the market

how market makers manipulate prices to take YOUR money off YOU!

Making the Market
Trader Jack 2004

Almost everything you have ever been told about the world's stock markets is wrong.

Almost everything you have ever assumed about the world's stock markets is also 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 squeal. OK, here we go.

Market Makers and their Role

Markets are composed of players of all sizes (including you and me!), the most important 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 more...