Tip of the Week: Choosing the Right Market Maker

At the slightest hint of sleaze, quietly slip away from a market maker.  Some market makers try to get compensated for their efforts, which is illegal.  The only money they can make is in commissions or their own profits trading the stock in question or by performing certain advisory services.  In truth, it really doesn’t make sense that market makers cannot be compensated.  They benefit when a stock trades more, so why not also pay them when that happens (and, of course, disclose this to the public)?  Alas, however, as of now the Financial Industry Regulatory Agency (FINRA) has seen fit to maintain an appearance of objectivity, which is not borne out in reality.  In 2006, the SEC Advisory Committee on Smaller Public Companies had recommended developing a method to compensate a market maker for filing the necessary documents to get a newly public company trading. Unfortunately the SEC has decided, at least for the time being, not to act on that recommendation.

If it seems the market maker is involved with small, newly public companies’ stock shooting to the moon way too quickly, be very cautious.  A money-losing company generating $3 million in revenue should not be trading as if its value was $300 million, yet this happens.  When it does, count on an SEC investigation, and ultimately, shareholder litigation.  Obviously, this should be avoided.

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