Some of these over-the-counter moves probably seem more random than lotto. But let's step inside the activity and make some sense of it, without giving up any names or confidences, of course. (You take your life into your hands if you ever reveal which firm is short what stock.)
So, back to National Gift Wrap.com, which, by the way, was doing quite well as of this weekend's update! Let's say National Gift Wrap.com announced an exclusive deal to be
Christmas wrap distributor. (Holy cow!!! Dad, come public already!!!!!)
Coming into today the stock is quoted last sale at 124, but it is looking 131 on this news. You are
, and you come in to your regular Nasdaq broker, Bag'em & Co., and you say to your trader, "I want to buy 25,000 National Gift Wrap.com." First thing out of his mouth is a stream of expletives revolving around the twin concepts of your mother and how everybody wants this stock.
You insist. You did a million dollars in commish with the guy last year. You let him vent, and then you say, "How about my 25,000?"
You have to understand that trying to buy some National Gift Wrap.com on a day it announces a Yahoo deal is a little like buying lottery tickets: You have to buy a whole bunch to try to get one winner.
Bag'em will take your 25,000-share buy order and sell you 1,000 shares. Period. End of transaction. A year ago Bag'em's trader would have shorted you 5,000 shares to work the order. The trader would then have tried to "recover" that stock in the open market. He might have gotten it back, after considerable difficulty, for a small loss. But as the year went on, it became harder and harder, and then, downright impossible, to recover that stock without incurring huge losses as the stock flew.
Now Bag'em's trader has learned his lesson. He's not even interested in working your order. He doesn't want your order. He wishes you hadn't called him at all. He has no National Gift Wrap.com to sell you and he doesn't want to short you any. In fact, if he shorted you 5,000, he might not be able to buy it back for 10, maybe 15 points. He could lose $50,000 in the time it takes for you to get on National Gift's site!
So what does he do about the thousand shares he sold you? He simultaneously takes 1,000 shares from "the Street," meaning he just goes out and buys it from another broker on what is known as an "agency" basis. That's why the stock moves up in such a disorderly way. Because a bunch of people are all doing the same thing, taking a thousand shares from somebody else who doesn't really have a thousand shares. The hapless market maker who gets that thousand-share order then goes out and takes a thousand shares to replace the thousand shares he just sold Bag'em. Next thing you know the stock is up 10, 15 or 20 points as one market maker after another takes stock to recover the measly 1,000 shares he sold to the other guy.
This is not trading. This is not investing.
This is just anarchy.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At the time of publication the fund was long Yahoo!, though positions can 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 by sending an email to