Specialists: How They Perform Their Magic In The Stock Market This article is made up of a variety of topics on the specialist and what he does in the market place to exploit his craft. The information that follows happens every day in every stock on the New York Stock Exchange. The problem investors have recognizing these issues is because they have been trained to look at all the wrong factors that control the market place as 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. What the investor must learn to recognize is the specialist’s short selling. Once he is able to identify its signs, he can use it as a decisive signal that warns him of impending danger. As stocks move to an important high or low, one can expect to see Dow volume reach 3.5 to 4.0 billion or more shares trade for three or more days in a row before a reversal takes place. As mentioned in earlier articles, volume figures are the most important clue to specialist intentions. Specialist control over volume is a highly creative exercise in the psychological management of the investment communities thinking as a whole. The specialist’s merchandising strategies are organized in minimize public selling during a decline, therefore, the amount of stock he must absorb, place on their shelves, and carry with them as they lower stock prices toward wholesale levels. This is a very difficult trick to pull off. Rallying stock prices from time to time, and rallying the investor’s hopes so that, although the evidence of declining stock prices is right there before his eyes, they will flatly refuse to
believe the evidence of there senses. It is this mastery over investor psychology that allows specialists to dominate the investment process. Intensely aware of the conditioning power of price, specialists are able to invade the investor’s intellect and to distort the investor’s perception of reality so that his formalized response to continually lower stock prices will be to do nothing except watch them decline still further. It is as though, in the course of a decline, investors have suddenly discovered they were on a burning ship. But because the investor has a strong belief in salvation, he does not abandon ship as soon as a fire is discovered. He first persuades himself that the fire will somehow go out, that “ things will get better .” .” As with most gamblers his unconscious belief is always that, by some magic, a miracle will take place. If the investor asked who had started the fire and 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 are able to derive benefits from a crashing stock market and that in order to enjoy these benefits stock values must go down. Throughout these articles I’ve tried to make the point that the use of the Dow average as an indicator is a great source of investor error; that it is the movements of the stocks that comprise the Dow that are important. Nonetheless, I refer to the Dow index figures. I do this because the movements of this average have in one sense tremendous significance since they point to an illusion that has enormous psychological impact on
investors. In determining a sound buying opportunity, what is important is that the evidence of specialist accumulations indicates preparations for an advance of significant proportions and most important of all, an elimination of the risk factor. Thus it is conceivable that one may be able to acquire a better portfolio of some of the best stocks with the least risk when the Dow is at its lows. The investor must remember that it is better to acquire 50 shares of an $80 stock in an environment in which the downside risks are limited than 100 shares of a $40 stock in a market that might see than stock decline to $15. The reason the industry fastens the publics attention on economic fundaments is that they cause the investor to plot a curve for buying at the top of a rally and selling at the bottom. The financial myths created by institutions and cherished by most investors are merely instruments for their defeat. In the final analysis there is no question but that investors would have a much higher standard of living now had in not been for the financial myths they learned in school, and devour each day in their newspaper’s financial pages. There is a canny wisdom in the way in which the specialist creates a confrontation with the markets innocents. Too late, the latter discovers they were unequal to the encounter and that the hands of their invisible adversary have them by the throat. Thus, with the infinite subtlety, the specialist advances his plot line one step further by showing the investor that what he feels he is unable to gain in the market because of his lack of skill he can gain because of the existence of luck. By raising prices high enough the specialist easily persuades the investor to forget the bad luck he has had in the past.
It is only natural that investors should want to know what is happening in the market, but for their own sake they should learn not to believe any absurdity merely because is was said by a Wall Street stockbroker or banker quoted in the New York Times, the Wall Street Journal, or any other major publication. One of the most popular myths is that the lowering of interest rates causes the market to rally. The fact is the rise and fall of interest rates serves as a convenient ploy to rationalize the movements of stock prices. Once the relationship between the Stock Exchange and the eastern banking establishment is identified, it becomes apparent that the critical task of these institutions is to employ whatever strategies are required for competing successfully against the public sector, the area upon which they mutually depend for the growth of their relationship and their incomes. That is not to say that the relationship is overly complicated. It isn’t. The fact is, many major banks have specialists in their stocks on the floor of the exchange with whom they do business. Each knows how and when investment accounts are accumulated and the manner in which those accounts are connected with an enterprise contrary to the interests of investors. When Exchange specialists require credit to finance either their investment accounts or their short sales, these banks stand ready to supply it. In order to make matters easier for themselves, specialists have devised a rule that allows them to borrow money from their bankers on “terms that are mutually satisfactory .” Since the banks fortunes are closely linked with the specialist’s, such loans are made on the basis of a common interest. As most bankers know, the policies of the Fed are determined not so much by the chairman
of the Fed as by the directors of the Federal Reserve Bank of New York. It is difficult for the average individual to appreciate that the Federal Reserve System serves as one of the chief apologists for the Stock Exchange establishment. The basic operations of an institution like the Fed, is its relationships with other institutions such as banks, corporations, the Stock Exchange, and government, are accepted as being inexplicable but constructive. The irrational movements of stock prices are also made to appear rational to the public. It is not at all surprising that, in order to make its practices palatable, the Exchange has created a highly functional body of myths to support the concept of an auction market that operates according to the laws of supply and demand. This not only is simple for the public to understand, but it enables the Exchange to command a continuing series of headlines. Since the heads of the Stock Exchange establishment are also the heads of the eastern banking establishment, it is a simple matter for them to determine when to raise and lower interest rates. The timing of either event is never by chance. Since billions of dollars are involved anachronistic scruples about the economic implications of high interest rates are willingly sacrificed to serve a rationale that justifies sharply rising or falling stock prices. Thus by using the formula in which stock prices advance as interest rates are lowered, the actual objective underlying advancing stock prices, which is to create demand for stock, is disguised. In the uninformed public’s mind, the event conforms to economic criteria. Thus the public is easily persuaded to buy when interest rates decline and to think about selling when they begin to rise.
The subtle balance between the forces of supply and demand is inoperative only because the specialist’s thumb is always on the scales. I have already mentioned the specialist’s book. The Special Study Report of the SEC stated (Part 2, page 77 and 166): In executing his brokerage functions the specialist has a powerful tool available to him only, giving him the insight into the possible course of the market, [his] exclusive knowledge of the orders on the book and the known sources of supply and demand available to him through the book give him a definite trading advantage over other market participants.
It is my opinion that once the investor determines that he wishes to sell his stock, he should enter his order with his broker after the close of the market to sell this stock ( at the market ) at the following morning’s opening. By avoiding placing a limit order on the specialist’s book, the investor can, in a fashion, limit his risk. The August through September 2007 rally is a case in point. With an understandable loss of perspective, investors entered stop loss orders (orders to sell if the price should decline to a certain level or below ) on the assumption that their orders would protect them from the hazards of a falling market. Thus when specialist’s purposefully dropped their stock prices, they were able to clear out ( purchase stock from investors ) these stop loss orders and then, after rallying prices, establish profits for themselves by selling this stock at higher prices. A secondary benefit accruing to the specialist from this maneuver, of course, that it enables him to conduct his next decline, ( the one we are in now ) through the same area on much lower volume. The Exchange is always able to trap investors into buying stock by raising prices. The question, however, is, how much demand can be brought forth by how large an advance during a particular period of time with its
particular economic background. It naturally follows that if specialists are able to discover that a certain amount of demand is present at a certain period in time, they then know it can be tapped again provided it’s within the same approximate time frame. Thus in the broadest sense, one of the principle functions of the August, September rally, as I saw it was to enable specialists to reconnoiter the environment, to examine investor attitudes, investor response to the stimulus of rising prices and the onset of seasonal tax selling factors. Price as always, was employed as an investigative tool. Much as the Geiger counter is used to locate radioactivity, price is used by specialist’s to locate volume. Because of its distortions of perspective, investors fail to recognize the dangers to which their attitudes toward price subject them. Volume is the investor’s window onto the floor of the Stock Exchange. Properly utilized, it brings the investor face to face with the specialist’s attitude toward his inventory, whether he wants to dispose of it or add to it and, therefore, raise or lower his price. The problem is that investors have not been properly trained to examine and understand how the movements of volume are used as an indicator of change. Instead they believe that high volume in the course of a rally is proof of the “market’s underlying strength.” In fact the very opposite is true. Volume is either a manifestation of specialist accumulation when it is on the downside or an indication of specialist distribution when it occurs on the upside. Since specialist short-selling is an aspect of specialist distribution, an understanding of the volume of specialist short-selling is fundamental to an understanding of the specialist’s intent toward his processes of
decline. The only assurance the investor can have that a limitation has been placed on the market’s downward process is that the decline is generally directed proportionate to the specialist’s inventory of short sales. In other words, how severe a decline will be in a stock depends on the extent of the specialist’s short sales and how well he conserves them. Rallying stock prices almost immediately after they have begun a decline is an institutionalized system for unloading the first batch of stop loss orders that are accumulated by specialists from their books. The scale of organization inherent in a decline – any decline – imposes on specialists in highly active stocks functions that demand their most scrupulous attention. The conflict of opposing interests between insiders and outsiders must be carefully disguised so as to not cause a breakdown in the game plan that would result in an avalanche of selling by outsiders. The investor is able to learn how to gauge the specialist, anticipate his intent and his movements from only two things, the worm of his price action and its shadow, volume. Although the specialist is the only one who knows what his plans are, what he is going to do, and when he is going to do it, the investor does know what he did, when he did it, and quite often, what it means he must do in the future because of what he has done in the past. The investor has one major
advantage over the specialist. The specialist can’t hide from him. He is, therefore, vulnerable. At the right time, all the investor need do is walk up to the specialists crap table and place his bet. The specialist has no choice he has to cover it. In seeking to perpetuate the power of the Exchange establishment, the media are of course, bullish at the market’s highs and bearish at its lows. Providing relief and false sunshine as counter-points to declining stock
prices, the media remain bullish until stock prices move within two weeks or so of the bottoms. Then, with all the force that their gifts of immediacy and free press grant them, the media manufacture despair.
stockholdings is lost because of a failure to “disciple ” members of the Stock Exchange establishment, or that the fate of the American economy is indivisible from the fate of the stock market.
The networks now provide live broadcasts right off of the floor of the Stock Exchange. These broadcasts are then uploaded into the network commercials of major brokerage firms. Stockbroker’s professional economists, and professors of finance are rounded up for various television programs. In a festive mood, these individuals voice their opinions on what they term a new bull or bear market. “ The market was looking for direction, it found it last week,” was the view of one economist.
Economic stability can endure in capitalist economics but not in coexistence with the Exchange establishment’s machinery of transaction. The consciousness underlying the forces needed to sustain the Exchange’s economic processes reflects a submission to political and economic patterns that are in marked contrast to those sanctioned by “capitalism.” That the Exchange has survived so long despite the consequences caused by its technology is, in it’s own way, a great if not bizarre achievement.
The most damaging aspect of the rhetoric of such economists is that it creates as sense of urgency among investors to commit into or out of the market place. Their conversations reveal that the world of the Stock exchange is alien to them. Never considering that there might be a reality that exists beyond their understanding, they asserted that the movements of stock prices was a reflection of the impenetrable forces of supply-demand operating within an equally impenetrable market mechanism. Although they admit their ignorance of how it is done, they are satisfied that the inward faculties and powers built into the market posses a consciousness and intelligence that now will crack a revival of economic growth in the country. The attribute the market’s movements to changes within the economy, instead of attributing changes within the economy to the market’s movements. They maintain, “our present system requires periodic slumps to restore profits and disciple labor .” They fail to recognize how seriously the technology of consumption is impaired when approximately three times every decade in excess of “one trillion” in investor’s
It would seem that the history of most investors is one of deliberate forgetting. They are incapable of seeing that it is their thought processes that are accomplices to their own self-destruction. Looking at the bait of rising stock prices, investors walk into the trap that has been prepared for them. They have no idea how fast stock prices can drop and the trap is sprung and the active direction of the trend is downward. Nor are they aware that the specialist’s continuing use of the short sale as stock prices decline creates an irreversible situation, since the specialist’s short sale is the ultimate policy-maker and the determinant of the trend. Buying into a rally in the presence of heavy specialist short selling is the resource of investors who have never properly understood the investment environment. Theirs is the kind of behavior one must avoid if one is to survive in the market place. The investor must see clearly that the error that has always been committed by him is that he has been unconscious of the way the specialist’s short sale provides the subtext for
the Exchange’s economic drama and that he and other investors have failed to see that it is actually their demand that calls the specialist’s short sale into existence. Unaware of this, they look upon the current demand for stock as a reflection of “ the market’s underlying strength .” They continually fail to recognize that their demand has created and moved into position the Exchange’s juggernauts of transition and crisis. The investor must learn to rise above the emotional impress of the conventional thinking and responses of investors by evolving a procedure that will enable him to act in a way that is not a response programmed or contrived by the Stock Exchange. The best way for him to do this is to practice one-upsman-ship on the specialist. The investor must employ his imagination to move through the specialists’ looking glass to see himself as he is seen by the specialist. To do this, he must imagine himself as a specialist and then project what his attitudes and behavior patterns would be toward investors. Employing this kind of rear view mirror gazing, the investor can then more readily begin to recognize specialist short-selling for what it is; and to understand what his own response would be to a great influx of public demand. The very first thing that then happens, of course, is that the investor sees quite clearly that were he in the specialist’s position, he too would employ the opportunity to maximize profits by acquiring an investment account of short sales. This then would also be his ultimate response, as a specialist, to public demand. The power of recognition is the investor’s greatest tactical weapon. Richard W. Wendling 11/23/07
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