What is market making?
Holding the market is the deliberate practice of placing active or pending orders for a security in a market where the price drops rapidly in order to artificially “keep” the price of the security stable, or to create a floor in the security. This practice is prohibited in most cases, except when a broker or another party is mandated to maintain the price of a stable security; this is only done in rare cases where the depth of the market is not sufficient to maintain the price.
“Holding the market” can also refer to the practice of having a large market index such as the S&P 500 or the Wilshire Total Market.
Key points to remember
- Holding the market refers to an illegal commercial practice which attempts to support the price of a security after the publication of a negative news which would otherwise cause its price to fall.
- Market holding may be permitted in certain cases where regulations require market makers or specialists to add liquidity to markets with little depth.
- However, not all cases of stable action in the face of negative news do not keep the market – perhaps a pension fund is making an offer for a large block – and therefore only an investigation can reveal a practice contrary to the ‘ethics.
Understanding market behavior
It is difficult to maintain the market these days, as anyone should have very deep pockets to have a significant impact on the price of a security. One of the things that keep the market from happening more frequently is that it is rarely profitable and can often lead to serious losses if prices do not rebound.
However, if such an investor with very deep pockets plans to maintain the market strategy, he should certainly try to understand first why the price of the stock drops.
Falling stocks often have recurring themes which, once identified, can help an investor decide if maintaining the market strategy is the right course of action. These themes are usually related to one of three things: market movement as a whole, industry action or company-specific issues.
Considerations for a market maintenance strategy
Most stocks react to market sentiment predictably. Therefore, if negative news is published and the stock price remains stable or even increases, especially with an above-average trading volume, further investigation may be warranted. If the fundamentals of a business have not changed dramatically for the better, a group of individuals or companies may be trying to artificially maintain the price using a series of bid orders , many of which may be forged orders that do not intend to trade.
Of course, not all abnormal or unexpected price movements are harmful. There may be legitimate buy orders for large blocks placed by institutional investors for several reasonable and authorized purposes, such as rebalancing, hedging or adding to a large portfolio.