Battles have been won and lost simply on the ability of one side to hide well. Even a superior enemy can’t take you out if they can’t find you (which is no coincidence why we are guerilla stock traders). Had the U.S. Army had Vietnamese seeking missiles, Vietnam would be a U.S.-owned property.
Institutional traders work for banks, brokerage houses, and similar firms. A company may have more than a hundred traders sitting behind rows of expensive equipment.
Institutional traders use dirty tactics in the stock market that are so bad; they should be illegal. Learn how these apex predators work so you can avoid being their prey.
#1 The Phone Number To All Market Makers
Let’s say an Institutional trader has to dump 100,000 shares in a stock. He has so many shares that if he sold the stock the way we do, he’d have a bunch of partial order fills all the way down. Short sellers would make a killing. So what an Institutional trader will do is prevent the short sellers from cashing in by making a call to a number of market maker buddies of his. He might call five or six different market makers and sell them 20,000 apiece, each at varying prices.
#2 Back Door Deals With Market Makers
What happens if an Institutional trader has to dump a 100,000 shares in a stock that only trades a total of 20,000 shares a day? Once again, they can call their market maker buddies and work a back door deal that screws short sellers out of their profits. A market maker will set a specific price to buy all the shares the Institution wants to sell at $1 or $2 in the hole meaning below where the stock is actually trading for average stock traders like you and me. The idea is to take the initial price, which is below where it’s trading, and get out of it for the Institutional trader. And he’s not taking the risk of selling 10,000 shares down a point, but not seeing a bid for the next 10,000 shares that he has to sell until three points down. So the first sale is your best sale. And if you have to get out of a block, that’s the way to do it. This totally screws the short sellers. It also pays out to the market makers who get to sell the stock to average traders like you and me for $1 to $2 more than what they bought it for from the Institutional trader. It also means that average traders are paying a $1 to $2 more per share than the Institution trader and market makers know it’s actually worth.
#3 They Can See All Limit Orders
Institutional traders can see all the limit orders for any stock. You and I can’t. This means that they know exactly how many buy orders are waiting to be automatically executed above a certain resistance level or how many sell orders are waiting to be automatically executed below a certain support level. In other words you and I set our resistance and support levels based on past price movement. Institutional traders set there resistance and support levels on actual market demand, knowing exactly how many shares will be bought or sold at various price levels.
This means that Institutional traders have all kinds of advantages over us average traders. For example, Institutional traders engage in what is called “running the stops”. False breakouts happen when Institutional traders organize hunting parties to run stops.
For example, when a stock is slightly below its resistance at $30, the buy limit orders come flowing in near $28.50. The institutions calculate the liquidity ratio which measures how much the stock will go up if all buy limit orders are executed at $28.50. They calculate that the stock will run to $31 if all the buy limit orders at $28.50 are executed. They short the stock at $30 to push it down to $28.50. At $28.50 they cover their short position and go long as the wave of buy orders are automatically executed pushing the stock up to $31. If greedy traders start piling in, the institutional trader will stay long the trade. As soon as the buy orders start drying up, they sell short and the price falls back below $30. That’s when your chart shows a false upside breakout.
Sometimes, Institutional traders will clear out players from the table by “running the stops” all the way down. Case in point is what happened in Dendreon (DNDN) in April of 2009. Institutional traders began selling within the space of a few minutes. Having risen to nearly $25 by about 1 PM, trading was halted in the stock at 1:27 PM, with it now trading at $11.81! The next day, the stock shot straight back up to its former levels. What happened is that Institutional traders saw a beautiful set up in the stop loss orders where they could sell 10% of their position on the open market which would trigger another 30% drop by way of stop loss orders being automatically executed. Then after market close, they called their market maker buddies and arranged a very large buy order to be executed before market open the next day which gap opened trading. The end result was that rather than just buy more stock from share holders at a higher price, Institutional traders cheated stock holders out of their gains by forcing the stock to drop more than 50%, then buying up all the shares from those panicked sellers. Today the stock trades for more than $36 a share with Institutional traders making more than 200% from this “running the stops” move.
#4 Squawk Box Or Black Box
So why do Institutional traders quit their day jobs, trade for a living at home, then wash out and have to go back to work as an Institutional trader? Why couldn’t these guys take the lessons they learned in their day jobs home with them? Well, other than not having access to stop orders, there’s another dark truth. Or should I say black truth.
Rumor has it that ex-CIA economists offer a service to Institutional traders that costs $15 million dollars a year to have. It’s a box that plays live audio from the exchange floor that provides informative audio quotes which include bids/offers, quantity and activity of major brokerage houses, local floor traders and others. This audio is several minutes ahead of “real time” stock data feeds. Rumor also has it that these guys travel to various companies and interview CEOs and even attend public stock holders meetings and earnings announcements. They use CIA training tactics to tell if someone is lying.
When Institutional traders don’t have these advantages trading from home, they become ordinary losers just like the rest of us.