Page 15 - A Complete Guide to Volume Price Analysis: Read the book then read the market

dropped his prices quickly, making people even more desperate to sell before their widgets became worthless!

As the prices fell further, more and more people cracked under the pressure. Uncle Joe was now buying back an enormous volume of widgets.
After several weeks the panic selling was over, as few people had been brave enough to hold out under the pressure.

Uncle Joe could now start to sell widgets again at their old levels from his warehouse full of stock. He didn't mind if it was quiet for a few months,
as he has made a great deal of money very quickly. He could afford to take it easy. His overhead expenses were covered and he could even
pay his staff a healthy bonus. Everyone soon forgot how or where the rumours had started and life returned to normal.

Normal that is until Uncle Joe started thinking one day. I wonder if we could do that again?

Uncle Joe's story is of course fiction. It was written before I discovered the work of Richard Ney, but it is interesting that we both use the same
analogy to describe the insiders, the specialists, or what most people call the market makers.

It is my view, (and of Richard Ney) that this is one of the great ironies of the financial markets. Whilst insider dealing by individuals on the outside is
punished with long prison sentences and heavy fines, those on the inside are actively encouraged and licensed to do so. The problem for the
exchanges and governments is that without the market makers, who are the wholesalers of the market and provide a guarantee of execution of the
stock, the market would cease to function. When we buy or sell in the cash market, our order will always be filled. This is the role of the market
maker. They have no choice. It is their remit to fulfil all orders, both buying and selling and managing their order books, or their inventory
accordingly.

As Ney said himself, the market makers are wholesalers, nothing more, nothing less. They are professional traders. They are licensed and
regulated and have been approved to 'make a market' in the shares you wish to buy and sell. They are usually large international banking
organisations, generally with thousands or tens of thousands of employees worldwide.

Some of them will be household names, others you will never have heard of, but they all have one thing in common - they make vast amounts of
money. What places the market maker in such a unique position, is their ability to see both sides of the market. In other words, the supply and
demand. The inventory position if you like.

Just like Uncle Joe, they also have another huge advantage which is to be able to set their prices accordingly. Now, I don't want you to run away with
the idea that the entire stock market is rigged. It isn't. No single market maker could achieve this on their own

However, you do need to understand how they use windows of opportunity, and a variety of trading conditions to manipulate prices. They will use
any, and every piece of news to move the prices, whether relevant or not. Have you ever wondered why markets move fast on world events which
have no bearing. Why markets move lower on good news, and higher on bad news?

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The above explanation is a vast over simplification but the principle remains true. All the major exchanges such as the NYSE, AMEX and the
NASDAQ have specialists who act as market makers. These include firms such as Barclays plc (BARC) and Getco LLC that oversee the trading in
shares and what is often referred to as The Big Board (shades of Jesse Livermore, perhaps). According to Bloomberg Business in 2012
‘exchanges are experimenting with ways of inducing market makers to quote more aggressively to attract volume’. In addition, in the same article
the US exchanges are very keen to increase the number of companies who can act as market makers. But, other than this, not much has changed
since the days of Richard Ney.

Do these companies then work together? Of course they do! It goes without saying. Do they work in an overt way? No. What they will all see, is the
balance of supply and demand in general across the markets and specifically in their own stocks. If the specialists are all in a general state of over
supply, and a news story provides the opportunity to sell, then the market markers will all act pretty much in unison, as their warehouses will all be in
much the same state. It really is common sense once you start to think about the markets in this way.

On the London Stock Exchange there are official market makers for many securities (but not for shares in the largest and most heavily traded
companies, which instead use an electronic automated system called SETS).

However, you might ask why I have spent so much time explaining what these companies do, when actually you never see them at all. The answer is
very simple. As the 'licensed insiders', they sit in the middle of the market, looking at both sides of the market. They will know precisely the balance
of supply and demand at any one time. Naturally this information will never be available to you, and if you were in their position, you would probably
take advantage in the same way.

The only tool we have at our disposal to fight back, is volume. We can argue about the rights and wrongs of the situation, but when you are trading
and investing in stocks, market makers are a fact of life. Just accept it, and move on.

Volume is far from perfect. The market makers have even learnt over the decades how to avoid reporting large movements in stock, which are
often reported in after hours trading. However, it is the best tool we have with which to see ' inside the market'

Volume applies to all markets and is equally valuable, whether there is market manipulation or not. Volume in the futures market, which is the purest