31/07/2003
Potter is away so will Harry get to play? I do hope so and perhaps it is a triumph of optimism over experience but I do feel that these markets are poised to break out of the range today, with the upside remaining a slight favourite.( Ok more than a slight favourite but I don't want to put a hex on it.)
One aspect of the markets that has certainly come to our attention recently is intra day price action and especially some slightly dubious moves around major chart levels.Without being to instrument specific let me give a short lesson on market makers. When I talk about market makers I do not mean the likes of E-Trade or CMC but what we call primary market makers. These are the major banks who will in certain financial instruments make the market. Let us take Forex as an example.the role of a market maker is to make a two way price to other banks and customers consistently during the trading day. Not every bank will make a market in every currency pairs.Most will quote the euro dollar but very few will quote Sterling Swiss. If a smaller bank is asked for a price in a large amount of Stg Swiss they will generally call up a bank such as UBS, get a price from them and then just increase the spread. IE UBS might quote the smaller bank 2.2013 to 2.2020 and the small bank will quote their customer 2.2012 to 2.2022.
Similarly with shares there will be a few main companies that quote them and then the rest of the market will either quote around these prices or else add bids and offers in. let us take todays move in BAY as an example. here is how a market maker MIGHT think. He knows that the recent press has been bad and that 175/176 is a chart level. How does he know this? Well either he is not a total Muppet and can understand basic charts or else, and more likely, he has stop losses from customers on his book at 175.50 and 176.00. As potter is always saying, never ever leave a stop in the market right on a major level. It will get taken out. So back to today; a market maker after the slightly better figures might think "Ah I have stop losses up there, there is some initial buying, lets take some stops out." If the market is 175.to 175.50 with a small offer and you also see there is a small offer behind at 176.00 and you are sitting there with stop losses for 500,000 shares at 176.50 it is very easy to just pay the offers at 175.50,176, and 176.50, probably only getting 50,000 shares, thus triggering the stop loss and getting one short at a lovely level; especially now its below 170!
This might sound dodgy, personally I think it is just part of the game, but it is something we have to be ready for and deal with. The important thing is to lreave wriggle room on major levels. If this means taking smaller positions then that is fine. Movements after figures, especially in the morning, are often volatile and quite often two way. IE if they rise initially they will often fall afterwards and vice versa. this is why we were looking to buy on dips if the initial move today in BA had been lower.
Ok here endeth the lesson and now to start thinking about the Muppet of the Month. Any suggestions?
Harry