Sometimes the most informative information I can give readers tends to be stuff I take entirely for granted. The other day, disgusted at the way some of my stocks went out, I penned a
quick piece about how institutional sellers can play a role in making stocks go out heavy at the bell, in order to make themselves look good.
I know we have a ton more subscribers than we used to, but I was not prepared for the deluge of mail from investors and traders alike expressing awe and shock at this practice. Readers' eyes were opened to something that I have taken for granted ever since I first saw my wife do a block trade in 1987. Some of you are incredulous that this stuff occurs.
That got me thinking that I ought to go over how a trade might work on a day like Monday, when the tape was robust. I am going to use
as an example, a name my wife used to trade very aggressively that has since been devoured into
Let's say we had made our channel and inventory checks on linerboard (chiefly by asking my Dad, who at one time sold a huge amount of linerboard at
National Gift Wrap and Box Company
). In the linerboard business (that's corrugated to the uninitiated) there are always price increases and feints of increases and listed price hikes that don't go through. It is a big cat-and-mouse game that during inflationary spirals is a heck of a lot of fun to play.
During one of these periods we may have discovered that the increase was sticking, maybe because some Canadian plant was on strike or some American plant had shut down. My wife, the
, would get all fired up and take down 200gs of Stone, which perpetually seemed to be at 16 for most of our seven years of working together.
Sure enough, some yahoo on the sell side would also get wind of the price increase. The next day he would go out and make the call that Stone Container has to be bought because the increase is sticking and he is raising his numbers from a loss of $2 to a profit of $5. Yep, this is a cyclical business.
The stock would gap open at $17.25, say, on a Monday like this week's session, and the TG would look at me and say "I'm outta here." Sure enough, she would check with one of her traders at a block house (
at that time) and see who was "working the buy orders." Most of the time the firm that raised the numbers had caught the biggest buyers. If my wife felt the trader at that firm was honest and even-handed (meaning he wouldn't screw us in favor of
) she would give him the 200,000 shares of Stone to work out of for the rest of the day.
Now, here's the fun part. My wife was a shark. She trusted no one and she would check out how Stone was doing all day, not just with the working broker but around the Street. She wanted to be sure that she was getting the best execution possible. All the desks respected my wife -- with one or two vicious and evil exceptions, all of who are probably doomed to work small orders in a special section of Hell -- and they wanted to show her they could do a great job.
The easiest way would be to get the vast bulk of the 200,000 shares done during the day during the most fervid demand, but my wife always knew that some of these brokers would keep some back to sell sloppily at the close to knock the stock down a bit. Did anyone ever say he was doing this? Nah. Did it happen exactly as my wife described it? Almost every time. Sometimes she did it just to please me. She would say, hey, got out of that Stone before it tanked. Or, "take a look at that average sell price, half-point better than the close."
That's how she showed value-added on days when I was doing all of the stock picking. Sometimes the broker would make the stock heavy at the end of the day with an eye toward the variable commission structure my wife lorded over them. "Put an extra three cents on that order, or put a dime on it," she would say, with a desire to show gratitude. (Ten cents a share is big biz in the institutional world.)
So, a lot of stocks closed down hard that might not have closed so weakly if someone wasn't out to impress my wife. Remember that when you see those ticks down in some stocks at the end of the day.
There is a game within a game at the institutional level. That's what my column is about. Stuff like what goes on with big blocks may never have anything to do with which stock you pick to trade. But I am about understanding the process and demystifying the world of big money trading. It's just that I have been in it so long I forget what seemed so alien to me when I got started.
I will work harder to point out these quirks and customs that we all take for granted that can help you become a more knowledgeable investor and trader.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Goldman. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at