Quote Originally Posted by brychao View Post
Billy, how do you define market makers vs institutions?

Market makers = banks?
institutions = mutual funds / hedge funds?

Also, what do you mean by "vested interest" on the market makers to accumulate GDX positions?

Thanks! Learning in leaps and bounds
Yes, institutional investors are mutual funds, hedge funds, but also pension funds or insurance companies for example. Their common trait is that due to their very large positions, they need to spread their accumulation and distribution over several days. They turn to market makers for executing their orders "at best" within a deadline and optimizing in function of the liquidity available in the market. Market makers fees for such operations are proportional to the actual volume-weighted average price (VWAP) of the position compared to the VWAP of the underlying instrument over the same timeframe. This is the first "vested" interest of market makers : when buying institutional positions, their interest is to push price down enough so as to be able to produce a better VWAP than the recent VWAP by the market. They typically target lower floor levels for that purpose, where they will accumulate in a consolidation, usually panicking the little retail guy along the way and "fishing for stops". Today, all that process is programmed with algorithms in High Frequency Trading (HFT) programs that are giving much weight to the multi-timeframe pivot floor levels as their intermediate price targets.
A market maker is also a broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. You are always buying from or selling to a market maker. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. Actually, market makers are managing for their own accounts inventories with many timeframes pivot and floor levels targets. This is their second vested interest: when, collectively, they see institutional distribution orders rising or large buy orders waiting at much lower prices, they are the only market participants authorized to sell short naked positions for their own accounts. So they sell short while breaking down an important pivot/floor support and they will cover their shorts while approaching the next lower floor support level, rarely before! As long as the lower level is not hit, they will do all they can to facilitate a quick and violent downside move.
Billy