Underwriters Market Makers

Underwriters Market Makers By William Cate
Brokerage firms are in business to make money They are not in
the business of building viable companies Nor, are they in the
business of making their clients rich Stockbrokers are
salespeople They are not investment advisors Anyone who
ignores this axiom will lose their money in the Market
Market Makers
The textbook definition of market maker is a thing of the past
The broker isn’t making a market in any stock trading on the
Over-the-Counter, Over-the-Counter Bulletin Board or Nasdaq
Small Cap markets You can’t expect your market makers to
support your share price
In the past, a market maker would attempt to keep a neat market
by trying to balance the bids and asks They would trade the
stock on their own account to maintain a stable share price
during times when there was not a match of sellers to buyers
This practice would greatly enhance the liquidity of the market
and diminish volatility Today, most of the brokerage houses
trade stocks short for brokerage houses profits It’s the second
most important source of income for most brokerage firms The
ease of selling short is why so many hyped stocks have so many
market makers
Under NASD (National Association of Securities Dealers) Rules
every stock trade represents two commissions There is the
commission paid by the brokerage firm client Computerized
trading allows wire houses to charge a few dollars to the client
for the trade Computer trading has reduced client commission
income to levels that require the brokerage firm to increase the
other NASD allowed commission This commission is called “the
spread” Marker makers make money by paying the buyer and seller
less money than the trade would cost them, without the market
maker The worst spreads occur in the OTC Market 50%
commissions on very low priced shares are fairly common The OTC
shows the Market Makers Bid/Ask and not that of the buyers or
sellers The market makers don’t want the investing public to
know the true bids and asks that are available The market
makers license to steal would evaporate Unless your equity
finance consultant knows how to limit the spread problem, your
shareholders have paid too much for your stock Potential
investors will pay too dearly for their shares As a public
investor or public company, your job shouldn’t be to make the
market maker rich The spread allows the market makers to make
money at the expense of the public and traded companies In
fact, the SEC and NASD should limit the spread to 35% However,
that doesn’t appear likely in the foreseeable future
Historically, there has always been a tendency in NASD Markets
to sell short the NASD traded companies Market makers sell
nonexistent shares and thus expand the float The Stockgate
Scandal reflects a real and deep-seated type of fraud in the
NASD Market The SEC appears to be working very hard trying to
ignore the Stockgate issue Unless the company’s advisors can
devise a poison pill defense against nonexistent shares, most
market makers are short sellers of the company’s shares they
trade Short selling guarantees the eventual collapse of the
company’s share price and in almost all cases, the company’s
fall into bankruptcy
Market makers defend their excessive spreads and sale of
nonexistent stock by pointing out that most public companies are
scams They see themselves as garnering the scraps left behind
by the swindlers and crooks Their argument being that if the
investing public is dumb enough to buy shares in a company with
no hope of success, what difference should it make to the public
who steals their money
Underwriters
The Big Rock Candy Mountain for most CFOs of private companies
is to find an underwriter offering to do a “firm commitment”
underwriting More often than not, the candy is made of cyanide
Here are a few of the reasons why doing an Initial Public
Offering (IPO) is usually a mistake for a private company 1
There is no such thing as a “firm commitment” underwriting Read
the fine print in the agreement and you’ll find that your
underwriter can withdraw from the agreement, without penalty, at
any time 2 The average cost of doing a SB2 Registration with
the US Securities and Exchange Commission (SEC) now exceeds
US$3 million Your odds of getting a SEC “Effective Letter” in
over a year are about even Doing an IPO is betting against the
odds and usually with borrowed money that the company can’t
repay 3 The NASD (National Association of Securities Dealers)
allows the underwriter to charge the company 18% of the money
raised This is a 10% discount on the share price, a 5% payment
of accountable expenses and a 3% payment of non-accountable
costs The 3% payment is due with the signing of the “firm
commitment” underwriting agreement It isn’t refundable 4 If
you have a hot IPO, like Google or Ebay, you will pay far less
than 18% of the funds raised to do your IPO If you have a
typical IPO, you will pay more than the 18% Requiring the
company to supply a percentage of the IPO buyers to the
underwriter does this
In almost all cases, a public company is better served doing a
Private Placement (PIPE financing) rather than an IPO or a
secondary offering CFOs that fail to seek outside equity
finance advice are certain to become victims of the hundreds of
pitfalls that await the unwary in the public marketplace They
are very unlikely to find the money their company needs
Speculative investors who think the public market is their Big
Rock Candy Mountain are certain losers They should join a
venture capital club or subscribe to a newsletter with a better
Market plan than getting rich quick now For the average
investor, the odds of winning their State’s lottery are better
than their odds of making a major killing in speculative stocks

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