Trading Analysis - 17th Oct 2018

Alfacomp

17 October 2018

End of Day


More activity than in the previous couple of days - though up until noon you might be forgiven for thinking that the day was going to turn out the same - essentially flat.

However consistent buying before noon led to an excess of more than half a million Buys and this, combined with the inability for Market Makers to pick up any significant number of shares at lower prices in previous days, may have forced then to conclude that they were not going to be able to close their c. 2.2M short position at any price lower than 27p.

Their only real way out of this problem would appear to be to 'double-up' - to raise prices, and fast, yet again selling more shares than they take in. This increases the size of their short position, but raises the average price they have obtained for the shares sold. This gives them a better chance of being able to close their short by subsequently walking the price down.

The danger in all of this is that these price movements attract day or momentum traders. When someone buys shares the Market Makers (generally) do not know whether they intend to sell them back later that day or in 5 years time - thus they have to treat all buyers as if they might be long term holders. In this scenario they have little choice but to move the price up in response to any buying pressure that might, for example, turn up at 8.01am tomorrow morning. The MMs will permit the SP to move in response to this buying pressure because they have reconciled themselves to having to go deeper with their short position.

If the Market Makers believe that this buying pressure will evaporate after a few days then they can sleep soundly in the knowledge that they can simply move the price back down in a few days time and that this will cause all the soft holders to sell up, giving the MMs the shares that they need cheaply.

However what the Market Makers do not want is for this behaviour to go on for any extended period of time - this might end up with them having sold something like 3M shares short at prices of 27-29p but needing to find those 3M, or more, shares at a time when the price is perhaps greater than 35p - this could yield them a loss of something like £200,000 (3M x 7p). Evidently a dangerous game to play when they could simply have collected risk-free a percent or two on the normal spread simply by just churning the shares that they buy.

The day traders did not turn up today - trading volume was only 4M - however following todays price finish they will quite possibly turn up first thing tomorrow morning. The Market Makers are still selling more shares than they have bought - some 473,000 at the end of trading. This extends their short position to something like 2.64M, as shown in the chart below. There is no obvious evidence yet of any large shareholder selling as was previously observed in the c. 30p trading window.


 

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