:: sell the market

market makers cash in to take money from the majority of the public again and again, with apparent ease.

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So what does a market maker do?

...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?

So how do you, as an external investor, determine whether the market is being 'sheepdogged' by the market makers, or is actually moving under the real influence of normal supply and demand? Slope. Key to a market maker being able to effectively set his average price is the speed with which he marks it up or down. For example, when squashing prices downwards, if the market maker lets the process take too long, he will accumulate stock at too high an average price, making it hard for him to reverse out at a profit. He needs to buy it at an average price nearer the low than the high. Speed is of the essence. That is why a typical day on the DOW (for example) consists of a wild rally or fall, followed by a gradual retracement, then perhaps another wild flurry of activity. Most action during the day happens in very short time periods. Now you know why.

Obviously, one of the reasons this is an art form to the market maker is that it requires a mind in tune with the thoughts of the general public in order not to 'kill the golden goose'. If a market maker is too blatant in these cash raids, the public, while not actually understanding the process, might stop playing due to the '5 times bitten' syndrome. more...