When Everyone Sells, Who Buys?

When all investors attempt seemingly to squeeze through the same exit door at the same time, then who takes the other side of their sell orders; in particular, an ugly market opening such as today's indicates?

The NYSE specialists and NASDAQ market-makers, that's who. It is the stated responsibility for the former group and implied responsibility for the latter to do just that -- in the attempt to maintain orderly markets, "When everyone sells, you (Mr Specialist) must buy, and when everyone buys, you must sell."

But that does not mean they should lose money in the transaction. In such an environment, they will repeatedly lower bids (their bid) until the sell (stop) orders stop their inflow, at which point the markets open, stocks gap lower, much lower -- and the moment they buy from you, me, us. While we panic, they keep their collective head about them. But they will not carry a position overnight, so sometime soon thereafter, typically within the opening ~45 minutes, the markets will up-tick -- they will create the up-ticks -- and they will sell into the price rise. Voilà, a seemingly stupid purchase becomes profitable almost immediately.

But how does an ugly opening become a reversal and a rally to a possible positive close? Short sellers follow the specialists and market-makers, and cover their short term short positions, which creates additional buying pressure. And then the (intra-) day traders purchase, seeking a profitable quick long-side trade. Swing traders purchase next, and then, position traders, and finally long term investors. Which explains, rather simply, how a market gets its legs... and has legs (new trend endures).

This process, simplified though I have made it, is not a prediction, merely an explanation into the markets' mechanics. It is why professional investors seek gap openings in either direction as an opportunity to fade - invest opposite the prevailing direction -- for however fleetingly they hold the positions.

Comments

[Roger Knights:]

"Wheels within wheels," as Ed Norton said.

2008 Oct 24 07:27 PM

[john s. gordon:]

a good rationale for outlawing computer program trading.
> jack

2008 Oct 25 08:06 AM

[Blue collar...:]

This is really going to sound extremely ignorant; However, when I was an undergrad taking economics courses such as Money and Banking (what an unsophisticated title) which included explanations of the Federal Reserve System, the stock market, etc. and why they were created...it was fairly easy to understand. What has happened since is even easier to understand.....it is a run away system of theft, greed and corruption that will prove to be the bane of our civilization and end of a Democratic Republic if drastic & severe changes are not made.
Viewed from where I now sit, the entire original purpose of the market has been all but lost..which was to furnish the necessary capital in order for a small business to become larger by persuading investors to furnish the capital by buying shares of stock in a "Corporation".
Fuhget about that simple main and sole purpose as of a long time ago. What we have now is nothing but a legalized means of wholesale gambling, whereby the incentive comes 98% from "growing" the value of the stock by virtually any means possible. Dividends? for the most part have no place, purpose, or existence...the big pay off comes when you buy and sell...often within an hour or less or days.
Now .....we have hedge funds, derivatives, instantaneous programed trading and indescribable and otherwise esoteric means of altering perspectives, messaging numbers, and just plain old simple cheating that will enrich the very smallest part of the population who sticks an untrained foot into the market. It is so wide open that the govt. nor anyone else could ever come up with rules and regulation that protect the innocent. Therefore, only a FOOL will even consider the market UNLESS he or she is fully trained and addicted to playing a game as bad or worse than "Russian Roulette". Today's stock market is the biggest fraud ever perpetuated on the world's working, middle class person trying to raise and provide for a family. God help us all if the population doesn't wake up .....much sooner than later.

2008 Oct 25 11:02 AM

[notsosmart:]

been saying it for years.dumb & uneducated as i am.wall st is vegas.you lose slower & nobody brings you a drink.of course the sheeples are dumb also as they get fleeced more & more.

2008 Oct 25 12:53 PM

[Diegojames:]

Well Yesss Wall Street was allowed to ripped up the bank accounts of everyone (including the the US ECONOMY).
SENIOR MANAGEMENT, BOARDS, CEOs AND CONGRESS LET THEM GET AWAY FROM REALITY.(regulatory agencies also)
NOW imagine if the MONEY had been spent on infrastructure, SOLAR, nuclear,WIND and GEO thermal and hybrid cars instead of fraud and another round of the gas guzzlers. Thank you CONGRESS for putting your graft and re election ABOVE the needs of the USA and its people.
Now AMERICANS are some of the kindest, warmest and sharing people on the PLANET.
So NOW WE HAVE TO SUFFER A COLLAPSED ECONOMY.
GOD LOVE THE GREEDY. TAKE BACKS AND JAIL TIME TO THEM AND CONGRESS.
DIEGOjames
Northridge, California

2008 Oct 25 07:20 PM