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Market makers #investments

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Market makers

Market makers seem to trade with no goal except to make money. On the AIM market, they often increase spreads to as much as 20% for no apparent reason. Trying to figure out what they were doing this week was a challenge as usual.

An analogy

I have an analogy that might help us figure this out. Market makers are supposed to be big traders in company stock. We would expect them to have a stock to trade with. Imagine a shopkeeper with a stock of shares in different companies under the counter. Suddenly the shop is full of people wanting to buy a particular share. His stock is low and so he puts the price up to encourage people to sell and to a certain extent discourage people from buying. If the trade is brisk he increases his stock. It is important to understand increases in stock and decreases because the buys and sells in the market aren’t always equal when that stock under the counter is being replenished.

Premier Foods

News of a bid on Wednesday had the shop full to overflowing with customers wanting to buy Premier Foods so the market maker increased the price by over 40%, just for starters. By the end of the day, the price had gone from 32p to around 60p. So the market maker has a good day  making his profit on the spread, trading large numbers of shares. So he ends the day with far more share certificates under the counter and an empty shop. Will trade be good tomorrow? The next morning he drops the price to encourage people to come in and trade. Now, which way will sentiment go now traders and investors have digested the takeover news overnight? The price dropped by 8% on Thursday morning but people were still interested and it went north after lunch. It dropped again to 52 by the end of the day. I suspect the market maker wanted to clear some of his stock for the bank holiday weekend so dropped the price. The big question is, which way will the price go on Tuesday, remembering the bid was for around 60p. Nissin bought shares for close on 60p too, maybe more. My guess is that we will see more interest in buying Premier on Tuesday in the market. Actions by market makers tend to hold share prices down and cause sudden surges because they don’t have enough stock under the counter to cope with demand at peak times.

The Gatwick Gusher

I see other shares that could surge at any time too. Look at Solo oil with an announcement coming on gas sales in Tanzania and more news of the ‘Gatwick Gusher’ coming soon. The spread on Solo Oil was at 10% until a few minutes before the close of the market yesterday when the ask price dropped to just 0.31. I was tempted to buy, but I don’t make quick decisions as far as the stock market is concerned.

My portfolio was up 7% thanks to Premier Foods and considering the market was down by over 1%, I think I had a good week.

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An idea for next week? Watch the oil price and enjoy the spring weather. Happy Easter!

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