Teaching You to Trade Stocks 76: Some Miscellaneous Histories of Toying with Market Makers 2

2007/9/3 19:19:43

Just finished a round of business. Have to be at the International Club by 8:30 — definitely won't be back before 11. So let me squeeze in a few words while I can.

Talking dream-nonsense about some miscellaneous history now doesn't mean the technical discussion is finished — far from it. I can only intersperse these between technical discussions so people aren't completely immersed in technique. After all, technique is only one aspect. The more comprehensive your perspective, the greater your achievements.

The following is dreamtalk. Anyone who believes it has problems.

Stocks are publicly available — anyone can buy or sell them. This is precisely what makes it complex. Generally speaking, the difficulty of purely wreaking havoc is of course less than the difficulty of building. If your technique is solid, you might own only 5% of the float, yet you can blockade someone holding 50% of the float.

Destroying a market maker ultimately comes down to two approaches: killing them through time; killing them through space. Market makers with psychological issues are the easiest to kill through time. Especially those with cleanliness obsessions who always want to wash the positions squeaky clean — these people are the easiest to play with. You just keep stirring things up inside, making them feel like the participants are chaotic and the chip distribution is messy. These tedious fellows will then wash and wash and wash, washing until the entire trend is over, and they're still washing. Many market makers have been killed precisely because of their excessive cleanliness obsession, especially the inexperienced ones with limited capital strength.

In the past, there was one move that was always very effective for playing these guys, though after being used too much, it became less effective. Now it's basically useless. At the time, the favorite tactic was to use a single account to buy a conspicuously huge quantity in one clean sweep. Anyone capable of being a market maker could basically monitor order flow — such an account couldn't possibly go unnoticed. Generally, something like this alone was enough to keep those novices busy for quite a while. At first, you don't mess with them on the order book — let them adapt for a while and get somewhat numb. Then it's time for new stimulation. For example, use another new account to buy an even larger quantity. Note: these quantities are generally kept below 2% of the float — you can't go so big as to shake their confidence in being market maker. After toying with them for a while longer, switch tactics. For example, start periodically messing with them on the order book in a neurotic fashion. Generally, the best time to strike hard is just when they're about to climax but haven't quite gotten there yet, leaving them with lingering aftereffects every time they approach climax thereafter. Through repeated torment like this, you turn them into an ED man.

Note: toying with someone doesn't work by just selling or buying mindlessly. In reality, when you actually go at it, it's all back-and-forth. When the other side dumps, you dare to catch; when they pump, you dare to sell. But those few intimidating display accounts must not be touched — keep them there to prevent the opponent from figuring out how deep or shallow the water is. Generally, for a blockade, holding less than 10% of the float is more than enough — actually, you don't even need that much. The principle is having the ability to churn out a massive volume with 10-20% turnover on the day you strike, with the oscillation range being sufficiently large — potentially limit-up to limit-down going back and forth N times. A stock, especially when churning out such a large-amplitude, high-volume oscillation right when it's about to climax — it'd be hard not to develop ED.

And churning out such volume doesn't actually require too many chips, because it's impossible for an entire day's trading to come from just one side. When churning, someone with high skill can completely manage to skim the spread while keeping chip loss to a minimum. But note: this kind of torment must be done at the bottom or relative bottom — ideally near the market maker's cost basis. This makes operations much easier. If the market maker gets frustrated and decides to quit, you must disrupt their exit — don't let them leave smoothly. As long as you can make them exit at a loss, that's success. In one sentence: don't let them leave with profit. Moreover, during the daily torment, you must use all kinds of methods to inflate their cost basis.

Some techniques are experience-dependent and not something ordinary people can pull off. For example, you must fully leverage the force of other component forces. The market maker is only one component force — if you can make good use of the other component forces, then the market maker has no choice but to let you toy with them.

The most ruthless form of torment is to completely stink up the stock — meaning all retail investors know this stock is an ED man — and then it becomes a showdown between two or N parties. Generally, once it reaches this stage, it's pure bandit logic. Either you leave at a loss, or you spend money treating everyone, otherwise everyone just holds out and sees who blinks first. The market maker holds more shares, ties up more capital, and their money might even be of questionable origin with time limits. Under such torment, 99 out of 100 will die.

Of course, there are even more ruthless methods — those are plays where the real skill lies outside the market. Generally, such moves shouldn't be used — it's a bit excessive, a bit indecent by the rules of the game. The most common of these plays is targeting the capital supply chain — as long as you can cut off the opponent's funding sources, who can't you destroy? And there are even more ruthless ones, but there's no need to discuss those.

The above is about killing through time — generally, this results in the formation of a complex large-level hub. Killing through space is an entirely different style of play. The basic principle is: if the market maker wants wind, help them get wind; if they want rain, help them get rain. This way, you first nurture their arrogance. Once they feel invincible and are riding high, you strike suddenly — and this strike must be steady, precise, and ruthless, taking their life in one blow. From a purely technical perspective, this means first smashing out a sufficiently brutal first segment, then accepting the retail investors' panic selling that follows. Here, the position of the strike is critical — too low and there's no killing power, too high and it's too late. Therefore, the timing of the strike determines success or failure. This requires experience, judgment, technique, and many integrated factors — not something ordinary people can pull off.

After catching the panic selling, it's used to block the market maker's counterattack. After the first segment of the strike, the market maker will definitely counterattack. At this point, you need sufficient ammunition for a Tashan-style defensive battle. Stocks have one advantage: if you run out of ammunition, as long as you have money, you can immediately procure more. So you must leverage this characteristic well, controlling the rhythm and energy of the blockade.

You must be careful: after the first segment, you can only catch retail investors' panic selling — you must not catch the market maker's selling. Since you struck first, if the market maker follows up by dumping too, you need to dump even more ruthlessly. Ideally, dump it straight into a V-shaped reversal. This way, even the Tashan defensive battle is unnecessary — the stock is at least crippled for a year or half a year. Finding another opportunity to finish them off completely is just a matter of time, isn't it?

Can't keep talking dreamtalk — it's almost 7:30, still have business to attend to. Signing off, see you next time.