There is usually a big gap between what we think something is worth and the price we can get for it.
Example: The New York Times says a painting is worth $10,000. The dealer offers $2,000. When the seller complains that the Times says it is worth five times what he is being offered, the dealer responds, "Sell it to the New York Times."
Bankers see this disparity between supposed worth and price every day as they look at the quote on their stock.
"We announced a 25% increase in earnings; why did our stock go down?" is the common complaint.
To most of us, this is a mystery-but not to the person who sets that price by being willing to risk capital and buy shares at the price he or she quoted in the paper.
To solve the mystery of what actually determines the bid and ask price, there is only one place to turn: the trader who makes a market in your stock.
I sat down with the chief trader of bank equities for Ryan Beck & Co., an investment bank specializing in New Jersey bank and thrift issues, to find out how he sets the prices, determines the spreads, and decides how big a position he will take in a bank stock.
Jay Suskind, 32, has worked on Wall Street for several years and has been at Ryan Beck for six years now. To handle this job, Jay-like most traders-has to hear and understand everything going around him while simultaneously carrying on one or two phone conversations.
Here are some of the questions I asked Jay to see just how community bank stock prices are determined.
QUESTION: How do you decide the spread between bid and ask? Sometimes they are wide enough to run a tank through, and sometimes they are so narrow a needle would get stuck?
ANSWER: It depends on the competition and the liquidity of the stock. If it is a hard stock to sell and no other market maker is undercutting me, I have to widen the spread so we don't tie up our capital and also possibly lose some of it. I'm getting rid of it.
QUESTION: How do you decide what a stock is worth (since you are the person who is the final determinant of real value)?
ANSWER: I have to read everything-earnings reports, talk of acquisitions, health of officers, and most importantly the technical factors, such as the price to earnings multiple as compared with those of other similarly sized banks. This means as much as today's supply and demand.
QUESTION: Does this take a lot of research?
ANSWER: If you can't remember every trade you made in the past few months ... forget being a market-making trader.
QUESTION: How do you decide how large a position-either short or long-to hold in an issue?
ANSWER: In addition to our feelings on the overall market, the factors that made you raise or lower your quotes apply again. But you also have to be a salesman.
Even though you are on the desk, you have to go out to the salespeople and tell the story of the stocks you have positioned, so they will in turn tell the story to their customers. If you can't sell as well as trade, you don't do well.
NASTY QUESTION: Does this mean that if you have a position on a stock, you have to push it-whether you changed your mind on it or not?
HONEST ANSWER: Well, if you are short a stock you are not going to sing its praises, and if you have too big a position you are not going to bad- mouth it. But you never lie, because once you have fooled a salesman or his customers, you have lost your credibility forever.
My conclusion: Jay's job may look easy-"buy at $13, sell at $13.75"-but dinner with him made me happy I am a college teacher and not a market maker.
