RE: red ink7 Nov 2017 18:11
You are probably partly right.
I've never been an MM so I cannot say for sure, but the general belief (and mine) is that it is generally to make it hard for traders to find out what's going on, and manipulate them psychologically.
People usually buy or sell when they believe that the SP will go up or down (respectively) in the near future, even when the fundamentals (if any) say otherwise.
If one sees what looks like a lot of buys, one will want to buy too, thinking that a rise is coming. And conversely, if there are sells, one will think that a decrease going to happen and one sells asap.
The "conveniently limited" system automatically assume a transaction is a sell or a buy when it is above or below the official median price (half-way between the lowest ask and the highest bid) regardless of the reality.
That means that whoever controls what bid and ask are advertised controls what the price looks like.
For medium and large cap companies, as it's not just MMs who handle the shares, it's possible to interpret the list of bids and asks, i.e. the order book (aka "L2"). That interpretation gives a very very very rough sense of where the SP is likely to go in the next few minutes or so. (There's a whole technique behind, it would take a while to go through this.)
But for small caps and AIM shares, when the order book consists exclusively of MMs, those can post whatever they want in the knowledge that nobody else will post a higher / lower bid/ask that would scupper they plan. Thus they control the short-term picture. In reality, they may accept buy / sells well within the announced range, even if those prices don't get posted.
So not only does it make it impossible to interpret the L2 to see where the share is going, but also it's hard to even see what the real median price of a share actually is!
MMs thus can make things look pricier / cheaper than they are and make it look like a share is more/less popular than it really is.
Sign In
Follow the stocks
