Sounds mad, doesn't it? But it doesn't matter, because I mark price down again. And again. And I keep on doing it till I hit stops of external parties who are long, but weak, or limit orders of people who are short. As a market maker, I know where these stops and limits are. I own book, after all.

Ordinary Joe Public mostly think market follows laws of supply and demand, follows trendlines or fibonaccis etc, which means they all tend to put their stops in similar places ('resistance' anyone? 'support'? That's right, it exists!). This is a game of chicken, really, and YOU will ALWAYS crack before ME (the market maker), because I can take market to zero, or to moon. You have to meet a margin call.

So now I am a market maker who has a LOT of supply of ABC Corp, which has fallen significantly in price. Looks like I'm holding a plum, doesn't it? What do I do next?

...That's right. I mark price up. And I QUICKLY mark it up to point at which current price is ABOVE my average purchase price. So voila. I'm in profit. In a fairly big way. All I need to do now is unload this stock to you over a period of time at a price above my average, and I am rich. You, of course, sold it to me on way down, and are regretting it because it is probably already way above where you exited (strange isn't it, how market seems to 'hunt your stops', and then reverse?!) If I do this right (and it is an art form, for which successful brokers get paid multi-million dollar salaries), I create illusion that market is totally random, and is being driven by YOU, whereas I am simply a fee paid middleman, facilitating your activities. Even worse, I give you vague impression that you are actually pretty good at it, and if you can only get your stops a little more accurate, you will stop losing money!

As I mark price up, external parties start to worry they will miss out on this growth, and begin an ABC Corp buying frenzy, allowing me to unload. Everyone is happy. Most of investing public are sitting on unrealized (imaginary) assets, while I am converting worthless shares into hard cash.

So, I have made a real, cash profit. You are sitting on an unrealized paper profit. We are all happy. Until I repeat process and stop you out. Again. Are you getting picture yet? In fact, once I have built a little momentum in a particular direction (long OR short) I can let you prolong it, settling simply for my spread profit. I know that eventually run will peter out, and then I can force it other way, easily dislodging those who took a position too near end of that particular phase.

Let me paraphrase. When market is zooming up madly, market makers are actually selling (usually stock they don't own!) in preparation for a subsequent managed fall, during which they can buy it back for less (i.e. make a profit). When it is crashing down, they are actually acquiring stock, in preparation for process of selling it back to you at a higher price (i.e. make another profit).

Does it EVER behave according to supply and demand?For answer to THAT question, you will need to consult full version of this article at www.traders101.com . Happy trading!

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