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Specialists: How They Perform Their MagicIn The Stock Market
This article is made up of a variety of topics onthe specialist and what he does in the marketplace to exploit his craft. The information thatfollows happens every day in every stock onthe New York Stock Exchange. The probleminvestors have recognizing these issues isbecause they have been trained to look at allthe wrong factors that control the market placeas we know it today.At market highs, specialists account for approximately 75 percent of all short selling,other Exchange members about 15 percent,and the general public about 10 percent. Whatthe investor must learn to recognize is thespecialist’s short selling. Once he is able toidentify its signs, he can use it as a decisivesignal that warns him of impending danger. Asstocks move to an important high or low, onecan expect to see Dow volume reach 3.5 to4.0 billion or more shares trade for three or more days in a row before a reversal takesplace.As mentioned in earlier articles, volumefigures are the most important clue tospecialist intentions. Specialist control over volume is a highly creative exercise in thepsychological management of the investmentcommunities thinking as a whole. Thespecialist’s merchandising strategies areorganized in minimize public selling during adecline, therefore, the amount of stock hemust absorb, place on their shelves, and carrywith them as they lower stock prices towardwholesale levels.This is a very difficult trick to pull off. Rallyingstock prices from time to time, and rallying theinvestor’s hopes so that, although theevidence of declining stock prices is right therebefore his eyes, they will flatly refuse tobelieve the evidence of there senses. It is thismastery over investor psychology that allowsspecialists to dominate the investmentprocess. Intensely aware of the conditioningpower of price, specialists are able to invadethe investor’s intellect and to distort theinvestor’s perception of reality so that hisformalized response to continually lower stockprices will be to do nothing except watch themdecline still further.It is as though, in the course of a decline,investors have suddenly discovered they wereon a burning ship. But because the investor has a strong belief in salvation, he does notabandon ship as soon as a fire is discovered.He first persuades himself that the fire willsomehow go out, that “
things will get better 
.”As with most gamblers his unconscious belief is always that, by some magic, a miracle willtake place.If the investor asked who had started the fireand was to learn it was another passenger who had deliberately set fire to his mattress,he would assume the arsonist was a madman.What is totally alien to the understanding of most investors is that Exchange insiders areable to derive benefits from a crashing stockmarket and that in order to enjoy thesebenefits stock values must go down.Throughout these articles I’ve tried to makethe point that the use of the Dow average asan indicator is a great source of investor error;that it is the movements of the stocks thatcomprise the Dow that are important.Nonetheless, I refer to the Dow index figures. Ido this because the movements of thisaverage have in one sense tremendoussignificance since they point to an illusion thathas enormous psychological impact on
 
investors.In determining a sound buying opportunity,what is important is that the evidence of specialist accumulations indicatespreparations for an advance of significantproportions and most important of all, anelimination of the risk factor. Thus it isconceivable that one may be able to acquire abetter portfolio of some of the best stocks withthe least risk when the Dow is at its lows.The investor must remember that it is better toacquire 50 shares of an $80 stock in anenvironment in which the downside risks arelimited than 100 shares of a $40 stock in amarket that might see than stock decline to$15.The reason the industry fastens the publicsattention on economic fundaments is that theycause the investor to plot a curve for buying atthe top of a rally and selling at the bottom. Thefinancial myths created by institutions andcherished by most investors are merelyinstruments for their defeat. In the finalanalysis there is no question but that investorswould have a much higher standard of livingnow had in not been for the financial mythsthey learned in school, and devour each day intheir newspaper’s financial pages.There is a canny wisdom in the way in whichthe specialist creates a confrontation with themarkets innocents. Too late, the latter discovers they were unequal to the encounter and that the hands of their invisible adversaryhave them by the throat. Thus, with the infinitesubtlety, the specialist advances his plot lineone step further by showing the investor thatwhat he feels he is unable to gain in themarket because of his lack of skill he can gainbecause of the existence of luck. By raisingprices high enough the specialist easilypersuades the investor to forget the bad luckhe has had in the past.It is only natural that investors should want toknow what is happening in the market, but for their own sake they should learn not to believeany absurdity merely because is was said by aWall Street stockbroker or banker quoted inthe New York Times, the Wall Street Journal,or any other major publication. One of themost popular myths is that the lowering of interest rates causes the market to rally.The fact is the rise and fall of interest ratesserves as a convenient ploy to rationalize themovements of stock prices. Once therelationship between the Stock Exchange andthe eastern banking establishment isidentified, it becomes apparent that the criticaltask of these institutions is to employ whatever strategies are required for competingsuccessfully against the public sector, the areaupon which they mutually depend for thegrowth of their relationship and their incomes.That is not to say that the relationship is overlycomplicated. It isn’t. The fact is, many major banks have specialists in their stocks on thefloor of the exchange with whom they dobusiness. Each knows how and wheninvestment accounts are accumulated and themanner in which those accounts areconnected with an enterprise contrary to theinterests of investors. When Exchangespecialists require credit to finance either their investment accounts or their short sales, thesebanks stand ready to supply it.In order to make matters easier for themselves, specialists have devised a rulethat allows them to borrow money from their bankers on “
terms that are mutuallysatisfactory
.” Since the banks fortunes areclosely linked with the specialist’s, such loansare made on the basis of a common interest.As most bankers know, the policies of the Fedare determined not so much by the chairman
 
of the Fed as by the directors of the FederalReserve Bank of New York.It is difficult for the average individual toappreciate that the Federal Reserve Systemserves as one of the chief apologists for theStock Exchange establishment. The basicoperations of an institution like the Fed, is itsrelationships with other institutions such asbanks, corporations, the Stock Exchange, andgovernment, are accepted as beinginexplicable but constructive.The irrational movements of stock prices arealso made to appear rational to the public. It isnot at all surprising that, in order to make itspractices palatable, the Exchange has createda highly functional body of myths to supportthe concept of an auction market that operatesaccording to the laws of supply and demand.This not only is simple for the public tounderstand, but it enables the Exchange tocommand a continuing series of headlines.Since the heads of the Stock Exchangeestablishment are also the heads of theeastern banking establishment, it is a simplematter for them to determine when to raiseand lower interest rates. The timing of either event is never by chance. Since billions of dollars are involved anachronistic scruplesabout the economic implications of highinterest rates are willingly sacrificed to serve arationale that justifies sharply rising or fallingstock prices.Thus by using the formula in which stockprices advance as interest rates are lowered,the actual objective underlying advancingstock prices, which is to create demand for stock, is disguised. In the uninformed public’smind, the event conforms to economic criteria.Thus the public is easily persuaded to buywhen interest rates decline and to think aboutselling when they begin to rise.The subtle balance between the forces of supply and demand is inoperative onlybecause the specialist’s thumb is always onthe scales. I have already mentioned thespecialist’s book. The Special Study Report of the SEC stated (Part 2, page 77 and 166):
In executing his brokerage functions the specialisthas a powerful tool available to him only, giving himthe insight into the possible course of the market,[his] exclusive knowledge of the orders on the bookand the known sources of supply and demandavailable to him through the book give him adefinite trading advantage over other marketparticipants.
It is my opinion that once the investor determines that he wishes to sell his stock, heshould enter his order with his broker after theclose of the market to sell this stock (
at themarket
) at the following morning’s opening.By avoiding placing a limit order on thespecialist’s book, the investor can, in afashion, limit his risk.The August through September 2007 rally is acase in point. With an understandable loss of perspective, investors entered stop loss orders(
orders to sell if the price should decline toa certain level or below
) on the assumptionthat their orders would protect them from thehazards of a falling market. Thus whenspecialist’s purposefully dropped their stockprices, they were able to clear out (
purchasestock from investors
) these stop loss ordersand then, after rallying prices, establish profitsfor themselves by selling this stock at higher prices. A secondary benefit accruing to thespecialist from this maneuver, of course, that itenables him to conduct his next decline, (
theone we are in now
) through the same area onmuch lower volume.The Exchange is always able to trap investorsinto buying stock by raising prices. Thequestion, however, is, how much demand canbe brought forth by how large an advanceduring a particular period of time with its
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