An excellent read...long though...

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By: greensmachines2003
23 Sep 2004, 10:19 PM EDT
Msg. 85554 of 85564
(This msg. is a reply to 85551 by houstontex1110.)
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Houstontex

THanks but I cannot take the credit. It is a piece I picked up from www. intradersnation. com--
It sure makes one think though. Wish I was savvy enough to realize that before I bought NNOS when the Market Makers were distributing shares. I was a sucker then even though I thought I was seasoned a bit. I think I am a bit more wise now, and hope that I can take advantaage of what knowledge I now have in regards to the Market Makers and Specialists and their actions. I hope that helsp you too.
Here is another along those lines

Richard Ney on the Role of the Specialist

by Michael Templain, a fellow Bender

Fred Jacquot, the big Bender, le Gros Ventre as it were, has asked me to
provide a better, if somewhat longer, explanation of the writings of Richard
Ney; a task I am happy to perform.

"The story is told that after he had been deported to Italy, Lucky Luciano
granted an interview in which he described a visit to the floor of the New
York Stock Exchange. When the operations of floor specialists had been
explained to him, he said, 'A terrible thing happened. I realized I'd joined
the wrong mob'" (1Ney, 8).

It was with these words that Richard Ney began his first of three books on
the nature of the New York Stock Exchange. Ney wrote over 20 years ago, a
time when a 750 Dow was high and today's volumes were beyond imagining. Some
of his material is dated, and must be read in the light in which it was
written. But the main premise of his books is still true: that the
specialist exists not to ensure the free and orderly trade of stock in a
particular company, but to fatten upon the innocence and ignorance of the
small investor.

The New York Stock Exchange is not an auction market (2Ney, 86), though many
investors still hold onto that image. It is a rigged market. Volume is an
effect of price. Prices are controlled absolutely by the specialists, the
'market makers' in individual stocks. It was this discovery that led Mr. Ney
to eventually give us small investors a priceless gift: enlightenment.

"Studying the transactions in each stock, I became immediately conscious
that, on too many occasion to be a coincidence, a stock would advance from
its morning low and then, often during the afternoon, would show an up-tick
of a half-point or more on a large block of anywhere from 1,500 to 5,000 or
more shares. This transaction seemed to herald a transformation in what was
taking place, for immediately thereafter the stock would begin to drop like
Newton's apple. Before I could find out what caused this, another question
presented itself: What caused the same thing to happen at the low point in
that stock's decline? For it was also apparent that a block of stock of the
same size often appeared on a down-tick of a half-point or more, after which
the stock quickly rallied. Together these two facts seemed to give a stock's
pattern continuity. At the end of several days of investigation, I
discovered that these transactions at the top and bottom of a stock's price
pattern were for the specialist's own account. ... Clod that I was, I had at
last recognized that, although the study of human nature may not be
fashionable among economists, it is never out of season" (2Ney, 9).

The specialist is part of a system. First, he is part of that rare
fraternity of men who are all specialists in an exchange. It is a small
private club, to whose membership one can only be born. The specialists of
the Dow 30 exhibit the spirit of 'all for one, and one for all'. If one of
the 30 is having problems, the other 29 wait for him, before they move onto
their next agreed upon campaign (2Ney, 172). The rest of the specialists
take their lead from watching the Dow 30.

But the system is more extensive and more powerful than just the
specialists. The specialists are the heart of the exchange. The exchange, in
turn, has practical control of the major corporations, banks, insurance
companies, and brokerage houses in this country. These, in turn, influence
news reporting and the regulatory agencies.


More...

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continued...
ADVANTAGES OF BEING A SPECIALIST

The specialist has many advantages, many tools to use to pry dollars from
unsuspecting investors and mutual funds. Chief among these advantages is his
book. In his book he can see at a glance all the buy and sell orders from
the public and the funds. His book tells him of potentially massive sales
above and below his current price. This gives him a great advantage when he
is trading on his own investment and omnibus accounts.

Because of his book, the specialist sees shifts in trends long before anyone
else. This gives him a great advantage. The specialist will buy heavily at
the bottom of a slide (at wholesale) then advance prices and sell, at heavy
volume, at the peak of the rally (retail). He will then sell short and take
prices down. The turning points of a rally will be marked by heavly volume
in the Dow 30 (3Ney, 85-89).

When he desires he can even make large block trades without entering them
into his book. In this way the public is never made aware of those trades.
Should the specialist want to supply a buy or sell order from his own
accounts, rather than from public orders on book, he can and will do so
(1Ney, 156). Ney cites specific examples when his customers orders were
ignored while the specialist completed orders for his own accounts.

When serving as the market maker, the broker's broker, the specialist trades
from his Trading Account, which is to be used to service the needs of the
market. However, he also has Investment Accounts (plural). His Segregated
Investment Accounts put him directly into competition with every other
investor in his stock. The reason for he has segregated investment accounts
is that they enable him to convert regular income into long-term capital
gains (1Ney, 113).

In addition, he also trades on Omnibus accounts, taking orders from a
friendly bank on behalf of friends, family, and himself (1Ney, 58). Although
he is not allowed to be both long and short in his Trading account, he can
take the opposite stance in his Investment or Omnibus accounts (3Ney, 130).

A Specialist will often not have any shares in his trading or omnibus
accounts. If public demand for shares suddenly increases, the Specialist is
more than happy to supply those shares to the public by short selling. This,
of course, forces the Specialist to take the price down soon thereafter, so
that he may cover his short sales at the lower price. Or, the Specialist may
sell from his Investment Accounts, establishing a middle or long term high
(1Ney, 61), and then take the price down. Whichever strategy he employs, a
large public demand for stock ultimately drives the price of that stock
down, not up.

Distribution of large amounts of stock can be done from the specialist's
trading account, usually as short sales. The trading account can then be
covered by transferring stock from the long-term investment accounts into
the trading account (1Ney, 64).

The existence of the specialist's Investment and Omnibus Accounts is
ultimately detrimental to the public. "In a stock with only a small
capitalization or floating supply, the segregation of large blocks into
long-term investment accounts for the specialist further decreases the
supply of the stock available to the public" (1Ney, 61)

The specialist has absolute control over price. He can match the buys with
the sells in any way he sees fit. He can raise the price of the stock 3
points in three trades, and open the next day down 5.

The seeming unpredictability of stock prices is due to the fact that prices
exist at the whim of the specialist. A stock is only worth what the
specialist is willing to pay for it at the moment. The fluctuations you see
are, in fact, the evidence of how the specialist is working out his
inventory problems to meet his short-term, intermediate-term, and long-term
goals (2Ney, 172). The specialist will sometimes 'leap frog' his prices up
or down, creating a gap. This is done to keep a group of investors from
buying or selling at a particular price. 'Leap Frogs' show specialist
intent.

Ney offers specific examples where specialists opened stocks considerably
lower:

more....

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continued....

August 8, 1967 Chicago and Northwestern Railroad opened down 39 points.

October 21, 1968 one of the preferred stocks of TRW opened down 28 points.

February 4, 1970 Memorex opened down 29 1/2 points (1Ney, 15)

(FOR RECENT EVIDENCE OF SPECIALIST CONTROL OF PRICES CLICK HERE.)

"With $8,000, you can buy $10,000 worth of stock, but with $8,000 in stock,
any Stock Exchange member can buy $160,000 worth of stock for his own
segregated investment account" (1Ney, 112).

Because most investors have margin accounts, and the margin account
agreement allows their brokers to lend their shares, specialists have an
unlimited number of shares to borrow and sell short (1Ney, 68).

Margin agreements also allow the broker to use their customer's shares as
collateral without the customer's knowledge or permission. This practice is
fraught with dangers. In November, 1963, the Ira Haupt brokerage firm
(NYSE), which dealt in both stocks and commodities was caught unwittingly in
a scheme by one of its commodities customers to leverage nonexistent salad
oil. The failure wiped out the partners of the firm and left it owing some
$37 million in debts. "To compound Haupt's and the New York Stock Exchange's
problems, it was impossible to return the stock to customers because the
stock (held by the brokerage firm for its customers) had been pledged to
banks by Haupt" (1Ney, 122).

Margin accounts usually allow the broker to borrow any cash in the account
to use for his own purposes at no interest, even to lend back to the
customer for margin purchases, at interest (1Ney, 119).

At the bottom of a cycle of a stock, having panicked customers into selling,
the brokers and specialist borrow the customers' money to make their own
long-term purchases; using their advantageous margin to acquire large
amounts of stock. At the top of the cycle the process is reversed. Customers
are paid back their money by the brokers and the specialist selling their
shares to customers at a profit. The insiders even have extra cash to loan
customers for margin purchases (1Ney, 136).

Another powerful tool for the specialist is the short sale. Though the
specialist is responsible for 85 percent of the short selling done in a
stock, the Exchanges are loathe to print any timely data on specialist short
sales (2Ney, 94)(3Ney, 234). The specialist uses the short sale to control
both downward and upward movements of stock (3Ney, 88).

The private investor or mutual fund can only sell short on an up- tick. The
up-tick rules serves only to trap the public into selling short at the
bottom, as the specialist drives the price down without a single up-tick for
the public's use (1Ney, 72). But the specialist need not even create an
up-tick to sell short. The SEC has been careful not to publicize its rule
10a-1(d), in which sub-paragraphs (1) through (9) exempt the specialist from
the up-tick rule (2Ney, 97)(3Ney, 126, 215).

The Securities Exchange Act of 1934 prohibits pegging, the act of
artificially holding a stock's price at a certain level for the advantage of
the person or persons doing the pegging. However, SEC rule X-9A6 (1940)
allows pegging by specialists in order to 'maintain an orderly market' while
a large-block distribution of shares is taking place (2Ney, 117).

THE CORPORATION, THE SPECIALIST, AND THE EXCHANGE

The specialists and brokers hold shares "in street name" for investors, and
therefore can vote the proxies for those shares. Officers in a corporation
must report to the SEC any trading they do in the shares of their own
company. Yet the Specialist reports his profits in trading the shares in
that same corporation to no one (1Ney, 54-55).

The specialist, one of his partners, a friendly broker, their lawyers, or
their bankers, often sit on the company's board of directors, which makes
the specialist privy to information before the average trader. Where an
officer of a corporation is held strictly accountable to the SEC for his use
of 'inside information', the specialist and fellow brokers are accountable
to no one (1Ney, 54-55).

"It is an ideal situation. When you control a corporation's proxies,
everyone is sympathetic to your point of view and your choice of directors.
This is the other reason why nearly every major corporation listed with the
Exchange (NYSE, M.T.) has a broker or a broker's banker on its board. It
gives the exchange a pipeline to that corporation" (1Ney, 90).

Large brokerage houses, large banks, and the New York Stock exchange use
dummy corporations as fronts to hold large portions of stocks in
corporations. A list from any large corporation of its largest stockholders
will be a roll of these very dummy corporations, who show up on list after
list of major stock holders in America's largest corporations (2Ney, 19-23).

The intertwining of interests runs even deeper when the relations of Wall
Steet's top Law firms are examined. For example, in 1974 the New York Stock
Exchange's legal counsel also represented Chase Manhattan Bank. Both
entities, through their dummy corporations, were large stockholders in
scores of major U.S. corporations (2Ney, 26).

more...

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continued....

THE EXCHANGE, THE SEC, THE FEDERAL RESERVE, AND THE WHITE HOUSE

"The bankers' man, Senator Carter Glass, who steered the Federal Reserve Act
through Congress in 1913, had maintained that the Federal Reserve banks
would be merely 'lenders of money.' The only collateral they were to accept
was notes that could be paid when, in the course of business, goods and
services had been manufactured and distributed. However, almost from the day
of its inception, the Federal Reserve System set about making loans on
common stocks" (1Ney, 103).

Who sits on the Federal Reserve Board? ... Chief officers of banks and
corporations, all of whose companies are controlled by the Exchange (1Ney,
103-105).

Billions, perhaps trillions of dollars worth of stocks are now held by banks
as collateral for loans. This too works to the advantage of the specialists.
For, to protect their interests, banks will issue stop orders to sell the
stock before it falls below a certain price. The specialist holds those stop
orders in his book and therefore knows exactly where a large number of
shares can be had, and at what price they can be purchased. One quick sweep
down those ranges of prices will deliver to the specialist the inventory he
desires for short and mid-term purposes (1Ney, 101).

On June 30, 1934 President Roosevelt appointed Joseph Kennedy to be the
first Chairman of the SEC. Only 4 months before, Kennedy, along with Mason
Day, Harry Sinclair, Elisha Walker, and others were found to be responsible
for operating 'pools' that were actively manipulating stock. When these,
"poolsters withdrew and the boom collapsed the administration denounced the
men who operated them" (1Ney, 215). But what's a little denouncement between
friends?

The stock markets had been headed downhill since December of 1968. On May
26, 1969 a party was held at the Nixon White House. In attendance were John
Mitchell, Maurice Stans, Peter Flannigan, thirty five guests from Wall
Street, fourteen industrialists, seven bankers, five heads of mutual and
pension funds, and two heads of insurance companies. The next day a bull
rally began on Wall Street. May 27th saw the Dow Jones 30 average rise by 5
per cent in one day (2Ney, 71).

On April 17, 1971, President Nixon, who along with Attorney General Mitchell
had been a Wall Street lawyer (Maurice Stans was a broker), appeared for
photographs with friends from the New York Stock Exchange. Nixon recommended
the public to invest in the market. By April 28th the market was in a steep
decline. Nixon circulated, "to 1,300 editors, editorial writers, broadcast
news directors, and Washington bureau chiefs a list of the stocks of ten
corporations that had advanced during the past year" (2Ney, 32).

There is a revolving door between the exchange and Washington. SEC Chairmen
'retire' to go to work for the Exchanges or major brokerage houses at many
times their government salaries (2Ney, 50-63). SEC Chairman Hamer Budge was
found by Senator Proxmire's investigation to be making frequent trips to
Minneapolis to confer with officials of IDS. IDS was under investigation at
the time by the SEC. After leaving the SEC, Budge took the position of
Chairman of the Board with IDS (2Ney, 56).

NEWS AND FINANCIAL REPORTING

It is highly unlikely that we will see news reports critical of U.S. stock
exchanges, or of the specialist system. There is a simple reason for this.
All news organiztions are corporations and do but reflect their management's
views. Corporations that own media have specialists influencing the choice
of management. Newspapers, magazines, and television are but extensions of
the corporate world.

When Richard Ney's first book, The Wall Street Jungle, came out it was on
the New York Times best seller list for 11 months. Yet the New York Times
would not review it. The Wall Street Journal refused to take an ad from a
New York bookstore that featured The Wall Street Jungle (2Ney, 30).

All three of the major networks were wary of having Ney appear. NBC banned
only two people from appearing on the Tonight show with Johnny Carson: Ralph
Nader and Richard Ney. Not only do large banks, brokerage firms, and
corporations advertise on television, they also are the largest stock
holders (2Ney, 33- 34).

SPECIALIST STRATEGY

The specialist should be thought of as a merchant with some rather unique
inventory problems and opportunities. His goal, always, is to buy at
wholesale prices and to sell at retail. This applies to his actions in the
course of trading day as well as a year of trading.

At the bottom of a slide the specialist will buy heavily for his trading,
investment, and omnibus accounts. His goal then becomes to raise the price
of his stock with his wholesale inventory intact. In practice, though, he
may have to sell shares to meet public demand. This will cause him, then, to
lower the price to re-accumulate his inventory before he can proceed to
higher levels.

A rally begins while the price of the average stock is still falling. "Major
rallies begin and end with the unexpected," (3Ney, 184).

To stimulate public demand for his stock, near the high the specialist will
raise the angle of the rising prices dramatically for the stock. True to one
of Ney's axioms that prices beget volume, the public will rush into the
market place at the rally high. The specialist can now sell his accumulated
inventory to fill the increased demand. Heavy Dow 30 volume at the high is
evidence of heavy short sales by the specialists (3Ney, 113).

When the specialist has sold all his inventory, and has sold short, he will
then begin a downward slide of prices so necessary to his plans. Slides are
a mirror of rallies. Near the bottom, the specialist will increase the angle
of price decline, alarming investors, scaring them into selling their shares
to the specialist who needs them to cover his short sales, and to build a
new inventory at wholesale. The media will remain bullish, or cautiously
optimistic throughout a slide, until the last two weeks, when they will turn
suddenly bearish (3Ney, 158).

more...

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continued.... These tips are germane today as they were then...even though we now live in a more choatic
times and markertplace...


TIPS FROM RICHARD NEY:

Specialists in the most active stocks will require more time than their
fellow specialists to move stocks up or down, or to cover at the top of a
rally or the bottom of a slide (2Ney, 84-85).

Specialists may use a rally as a 'stalking horse' for a later rally. Price
is used like a geiger counter to locate volume (3Ney, 149).

During the typical bear market, or slide, the specialists will usually bring
prices up on Fridays, to keep investors hopes alive (2Ney, 92).

Leaders of the rally in the Dow 30 will often act as 'screens' for the price
declines of the other 24 or 25 Dow stocks.

Each stock exhibits its own distinct pattern or rhythm of price behavior
(2Ney, 189).

THINGS OF WHICH TO BE AWARE

How can you spot the nadir of each high and low? Ney says to look at volume
very closely. In particular look at the volume of the individual Dow 30
Industrial stocks (2Ney, 171). Get to know these specialists' habits. Follow
what they do. Patterns of behavior will emerge.

Ney emphasized that a sense of timing was critical for survival in the
market (2Ney, 149).

Ney was convinced that detecting Specialist short selling was a key.
Specialist short selling at the peak of a rally should be detectable through
increased volume.

Richard Ney used charts extensively. Ney was quick to point out that what is
really being measured in his charts is not the behavior of the masses in the
marketplace, but the techniques of the specialist in an individual stock as
he maneuvers to solve short-term, intermediate-term, and long-term inventory
problems (1NEY, 259).

Ney points to the gaps in prices that develop when a specialist is trying to
'catch up' with the market. These gaps, be they up or down, signal
specialist intent (2Ney, 172).

"Investors assume that what happens in the economy or to the corporation in
terms of earnings or sales determines the trend of stock prices. ... The
most misleading element in this type of analysis is that it ignores the
basic needs and motivations of the specialist system" (2Ney, 150).

We, as consumers react to certain critical numbers. Specialists know this.
Specialists use the 10's (10, 20, 30, etc.) and 5's (5, 15, 25, etc.) in
their strategies. They will use these numbers to elicit heavier buying or
selling from the public. Often too, though, they will avoid critical numbers
to avoid buying or selling stock when they do not wish to do so (2Ney,
155-156 & 163).

NEY'S SMALL INVESTOR TRADING RECCOMENDATIONS (1Ney, 297-301)

1. Do not buy the acknowledged leader in a field. Buy the number 2 or 3
company. These companies are more likely to be subject to bull raids by the
specialists (1Ney, 298).*

2. "Nothing puzzles me more than an investor's willingness to pay more than
fifty dollars a share for stocks. Buy low priced stocks. It's percentages
you're after and you'll get them in these stocks in a bull market" (1Ney,
298).*

3. Invest only in stocks listed on the NYSE. *

4. Do not buy secondary offerings from your broker.

5. Buy only stocks whose prices have fallen at least 35 to 50 percent.

6. "The rule, 'Cut your losses and let your profits ride,' was invented by a
broker" (1Ney, 298).

7. The average investor need not worry about tax brackets, so do not
hesitate to sell at a profit. "A short-term gain is better than a long-term
loss" (1Ney, 299).

8. Own your stock. Do not use margin. *

9. Do not sell short. *

10. Do not allow your stock to be borrowed (via a margin account; M.T.) *

11. Credit balances should be immediately transferred to your bank. *

12. Do not leave your stock with your broker in street name.

13. Invest only in growth oriented, not income, stocks.

14. 4 to 5 stocks in a portfolio is plenty.

15. Make arrangements with your bank to receive your stock.

16. If there has been a major advance from the summer lows, look for the
public to begin selling 6 months hence.

17. Big block sales at the end of a run-up (usually marked by heavy volume)
marks the imminent decline in price.

18. Look for bull raids in May, up from the April 15th tax low.

19. Never enter stop or limit orders. *

20. If you are interested in a stock, learn its specialist's habits.

21. Stocks that are ideal for bull raids are those that decline as close as
possible to an angle of 45 degrees.

* These are items with which we Benders disagree, or feel that need
modification or explanation. Please see THE BENDER'S BLEND at this site,
when it has been revised (M.T.).

Works Cited:

1Ney, Richard. THE WALL STREET JUNGLE, fifth printing. New York: Grove
Press, Inc., 1970.

2Ney, Richard. THE WALL STREET GANG, third printing. New York: Praeger
Publishers, Inc., 1974.

3Ney, Richard. MAKING IT IN THE MARKET. New York: McGraw-Hill, 1975.



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Note from the Bender:

We benders agree with much of what Richard Ney wrote. We disagree with much
of it also. The reader should note that Mr. Ney wrote at a time when the
volume of trading was much much lower than it is today. With today's volume
it is much more difficult to spot the highs and lows of a stock using volume
only. Ney also advised his long term customers to stay with Dow 30 and other
blue chip stocks. Still, his discoveries, particularly on critical price
points, make up some of the tools we Benders use. That makes his ideas
worthy of our attention, even though we do not choose to use or act upon
them all.

The Bender