Specialists: How They Perform Their Magic
In The Stock Market
This article is made up of a variety of topics on
the specialist and what he does in the market
place to exploit his craft. The information that
follows happens every day in every stock on
the New York Stock Exchange. The problem
investors have recognizing these issues is
because they have been trained to look at all
the wrong factors that control the market place
as we know it today.
At market highs, specialists account for
approximately 75 percent of all short selling,
other Exchange members about 15 percent,
and the general public about 10 percent. What
the investor must learn to recognize is the
specialist’s short selling. Once he is able to
identify its signs, he can use it as a decisive
signal that warns him of impending danger. As
stocks move to an important high or low, one
can expect to see Dow volume reach 3.5 to
4.0 billion or more shares trade for three or
more days in a row before a reversal takes
place.
As mentioned in earlier articles, volume
figures are the most important clue to
specialist intentions. Specialist control over
volume is a highly creative exercise in the
psychological management of the investment
communities thinking as a whole. The
specialist’s merchandising strategies are
organized in minimize public selling during a
decline, therefore, the amount of stock he
must absorb, place on their shelves, and carry
with them as they lower stock prices toward
wholesale levels.
This is a very difficult trick to pull off. Rallying
stock prices from time to time, and rallying the
investor’s hopes so that, although the
evidence of declining stock prices is right there
before his eyes, they will flatly refuse to
believe the evidence of there senses. It is this
mastery over investor psychology that allows
specialists to dominate the investment
process. Intensely aware of the conditioning
power of price, specialists are able to invade
the investor’s intellect and to distort the
investor’s perception of reality so that his
formalized response to continually lower stock
prices will be to do nothing except watch them
decline still further.
It is as though, in the course of a decline,
investors have suddenly discovered they were
on a burning ship. But because the investor
has a strong belief in salvation, he does not
abandon ship as soon as a fire is discovered.
He first persuades himself that the fire will
somehow go out, that “things will get better.”
As with most gamblers his unconscious belief
is always that, by some magic, a miracle will
take place.
If the investor asked who had started the fire
and was to learn it was another passenger
who had deliberately set fire to his mattress,
he would assume the arsonist was a madman.
What is totally alien to the understanding of
most investors is that Exchange insiders are
able to derive benefits from a crashing stock
market and that in order to enjoy these
benefits stock values must go down.
Throughout these articles I’ve tried to make
the point that the use of the Dow average as
an indicator is a great source of investor error;
that it is the movements of the stocks that
comprise the Dow that are important.
Nonetheless, I refer to the Dow index figures. I
do this because the movements of this
average have in one sense tremendous
significance since they point to an illusion that
has enormous psychological impact on
investors.
In determining a sound buying opportunity,
what is important is that the evidence of
specialist accumulations indicates
preparations for an advance of significant
proportions and most important of all, an
elimination of the risk factor. Thus it is
conceivable that one may be able to acquire a
better portfolio of some of the best stocks with
the least risk when the Dow is at its lows.
The investor must remember that it is better to
acquire 50 shares of an $80 stock in an
environment in which the downside risks are
limited than 100 shares of a $40 stock in a
market that might see than stock decline to
$15.
The reason the industry fastens the publics
attention on economic fundaments is that they
cause the investor to plot a curve for buying at
the top of a rally and selling at the bottom. The
financial myths created by institutions and
cherished by most investors are merely
instruments for their defeat. In the final
analysis there is no question but that investors
would have a much higher standard of living
now had in not been for the financial myths
they learned in school, and devour each day in
their newspaper’s financial pages.
There is a canny wisdom in the way in which
the specialist creates a confrontation with the
markets innocents. Too late, the latter
discovers they were unequal to the encounter
and that the hands of their invisible adversary
have them by the throat. Thus, with the infinite
subtlety, the specialist advances his plot line
one step further by showing the investor that
what he feels he is unable to gain in the
market because of his lack of skill he can gain
because of the existence of luck. By raising
prices high enough the specialist easily
persuades the investor to forget the bad luck
he has had in the past.
It is only natural that investors should want to
know what is happening in the market, but for
their own sake they should learn not to believe
any absurdity merely because is was said by a
Wall Street stockbroker or banker quoted in
the New York Times, the Wall Street Journal,
or any other major publication. One of the
most popular myths is that the lowering of
interest rates causes the market to rally.
The fact is the rise and fall of interest rates
serves as a convenient ploy to rationalize the
movements of stock prices. Once the
relationship between the Stock Exchange and
the eastern banking establishment is
identified, it becomes apparent that the critical
task of these institutions is to employ whatever
strategies are required for competing
successfully against the public sector, the area
upon which they mutually depend for the
growth of their relationship and their incomes.
That is not to say that the relationship is overly
complicated. It isn’t. The fact is, many major
banks have specialists in their stocks on the
floor of the exchange with whom they do
business. Each knows how and when
investment accounts are accumulated and the
manner in which those accounts are
connected with an enterprise contrary to the
interests of investors. When Exchange
specialists require credit to finance either their
investment accounts or their short sales, these
banks stand ready to supply it.
In order to make matters easier for
themselves, specialists have devised a rule
that allows them to borrow money from their
bankers on “terms that are mutually
satisfactory.” Since the banks fortunes are
closely linked with the specialist’s, such loans
are made on the basis of a common interest.
As most bankers know, the policies of the Fed
are determined not so much by the chairman
of the Fed as by the directors of the Federal
Reserve Bank of New York.
It is difficult for the average individual to
appreciate that the Federal Reserve System
serves as one of the chief apologists for the
Stock Exchange establishment. The basic
operations of an institution like the Fed, is its
relationships with other institutions such as
banks, corporations, the Stock Exchange, and
government, are accepted as being
inexplicable but constructive.
The irrational movements of stock prices are
also made to appear rational to the public. It is
not at all surprising that, in order to make its
practices palatable, the Exchange has created
a highly functional body of myths to support
the concept of an auction market that operates
according to the laws of supply and demand.
This not only is simple for the public to
understand, but it enables the Exchange to
command a continuing series of headlines.
Since the heads of the Stock Exchange
establishment are also the heads of the
eastern banking establishment, it is a simple
matter for them to determine when to raise
and lower interest rates. The timing of either
event is never by chance. Since billions of
dollars are involved anachronistic scruples
about the economic implications of high
interest rates are willingly sacrificed to serve a
rationale that justifies sharply rising or falling
stock prices.
Thus by using the formula in which stock
prices advance as interest rates are lowered,
the actual objective underlying advancing
stock prices, which is to create demand for
stock, is disguised. In the uninformed public’s
mind, the event conforms to economic criteria.
Thus the public is easily persuaded to buy
when interest rates decline and to think about
selling when they begin to rise.
The subtle balance between the forces of
supply and demand is inoperative only
because the specialist’s thumb is always on
the scales. I have already mentioned the
specialist’s book. The Special Study Report of
the SEC stated (Part 2, page 77 and 166):
In executing his brokerage functions the specialist
has a powerful tool available to him only, giving him
the insight into the possible course of the market,
[his] exclusive knowledge of the orders on the book
and the known sources of supply and demand
available to him through the book give him a
definite trading advantage over other market
participants.
It is my opinion that once the investor
determines that he wishes to sell his stock, he
should enter his order with his broker after the
close of the market to sell this stock (at the
market) at the following morning’s opening.
By avoiding placing a limit order on the
specialist’s book, the investor can, in a
fashion, limit his risk.
The August through September 2007 rally is a
case in point. With an understandable loss of
perspective, investors entered stop loss orders
(orders to sell if the price should decline to
a certain level or below) on the assumption
that their orders would protect them from the
hazards of a falling market. Thus when
specialist’s purposefully dropped their stock
prices, they were able to clear out (purchase
stock from investors) these stop loss orders
and then, after rallying prices, establish profits
for themselves by selling this stock at higher
prices. A secondary benefit accruing to the
specialist from this maneuver, of course, that it
enables him to conduct his next decline, (the
one we are in now) through the same area on
much lower volume.
The Exchange is always able to trap investors
into buying stock by raising prices. The
question, however, is, how much demand can
be brought forth by how large an advance
during a particular period of time with its
particular economic background. It naturally
follows that if specialists are able to discover
that a certain amount of demand is present at
a certain period in time, they then know it can
be tapped again provided it’s within the same
approximate time frame.
Thus in the broadest sense, one of the
principle functions of the August, September
rally, as I saw it was to enable specialists to
reconnoiter the environment, to examine
investor attitudes, investor response to the
stimulus of rising prices and the onset of
seasonal tax selling factors.
Price as always, was employed as an
investigative tool. Much as the Geiger counter
is used to locate radioactivity, price is used by
specialist’s to locate volume. Because of its
distortions of perspective, investors fail to
recognize the dangers to which their attitudes
toward price subject them.
Volume is the investor’s window onto the floor
of the Stock Exchange. Properly utilized, it
brings the investor face to face with the
specialist’s attitude toward his inventory,
whether he wants to dispose of it or add to it
and, therefore, raise or lower his price. The
problem is that investors have not been
properly trained to examine and understand
how the movements of volume are used as an
indicator of change. Instead they believe that
high volume in the course of a rally is proof of
the “market’s underlying strength.” In fact the
very opposite is true. Volume is either a
manifestation of specialist accumulation when
it is on the downside or an indication of
specialist distribution when it occurs on the
upside.
Since specialist short-selling is an aspect of
specialist distribution, an understanding of the
volume of specialist short-selling is
fundamental to an understanding of the
specialist’s intent toward his processes of
decline. The only assurance the investor can
have that a limitation has been placed on the
market’s downward process is that the decline
is generally directed proportionate to the
specialist’s inventory of short sales. In other
words, how severe a decline will be in a stock
depends on the extent of the specialist’s short
sales and how well he conserves them.
Rallying stock prices almost immediately after
they have begun a decline is an
institutionalized system for unloading the first
batch of stop loss orders that are accumulated
by specialists from their books.
The scale of organization inherent in a decline
– any decline – imposes on specialists in
highly active stocks functions that demand
their most scrupulous attention. The conflict of
opposing interests between insiders and
outsiders must be carefully disguised so as to
not cause a breakdown in the game plan that
would result in an avalanche of selling by
outsiders.
The investor is able to learn how to gauge the
specialist, anticipate his intent and his
movements from only two things, the worm of
his price action and its shadow, volume.
Although the specialist is the only one who knows
what his plans are, what he is going to do, and
when he is going to do it, the investor does know
what he did, when he did it, and quite often, what it
means he must do in the future because of what he
has done in the past. The investor has one major
advantage over the specialist. The specialist
can’t hide from him. He is, therefore,
vulnerable. At the right time, all the investor
need do is walk up to the specialists crap table
and place his bet. The specialist has no choice
he has to cover it.
In seeking to perpetuate the power of the
Exchange establishment, the media are of
course, bullish at the market’s highs and
bearish at its lows. Providing relief and false
sunshine as counter-points to declining stock
prices, the media remain bullish until stock
prices move within two weeks or so of the
bottoms. Then, with all the force that their gifts
of immediacy and free press grant them, the
media manufacture despair.
The networks now provide live broadcasts
right off of the floor of the Stock Exchange.
These broadcasts are then uploaded into the
network commercials of major brokerage
firms. Stockbroker’s professional economists,
and professors of finance are rounded up for
various television programs. In a festive mood,
these individuals voice their opinions on what
they term a new bull or bear market. “The
market was looking for direction, it found it
last week,” was the view of one economist.
The most damaging aspect of the rhetoric of
such economists is that it creates as sense of
urgency among investors to commit into or out
of the market place. Their conversations
reveal that the world of the Stock exchange is
alien to them. Never considering that there
might be a reality that exists beyond their
understanding, they asserted that the
movements of stock prices was a reflection of
the impenetrable forces of supply-demand
operating within an equally impenetrable
market mechanism. Although they admit their
ignorance of how it is done, they are satisfied
that the inward faculties and powers built into
the market posses a consciousness and
intelligence that now will crack a revival of
economic growth in the country.
The attribute the market’s movements to
changes within the economy, instead of
attributing changes within the economy to the
market’s movements. They maintain, “our
present system requires periodic slumps
to restore profits and disciple labor.” They
fail to recognize how seriously the technology
of consumption is impaired when
approximately three times every decade in
excess of “one trillion” in investor’s
stockholdings is lost because of a failure to
“disciple” members of the Stock Exchange
establishment, or that the fate of the American
economy is indivisible from the fate of the
stock market.
Economic stability can endure in capitalist
economics but not in coexistence with the
Exchange establishment’s machinery of
transaction. The consciousness underlying the
forces needed to sustain the Exchange’s
economic processes reflects a submission to
political and economic patterns that are in
marked contrast to those sanctioned by
“capitalism.” That the Exchange has survived
so long despite the consequences caused by
its technology is, in it’s own way, a great if not
bizarre achievement.
It would seem that the history of most
investors is one of deliberate forgetting. They
are incapable of seeing that it is their thought
processes that are accomplices to their own
self-destruction.
Looking at the bait of rising stock prices,
investors walk into the trap that has been
prepared for them. They have no idea how
fast stock prices can drop and the trap is
sprung and the active direction of the trend is
downward. Nor are they aware that the
specialist’s continuing use of the short sale as
stock prices decline creates an irreversible
situation, since the specialist’s short sale is the
ultimate policy-maker and the determinant of
the trend. Buying into a rally in the presence of
heavy specialist short selling is the resource of
investors who have never properly understood
the investment environment. Theirs is the kind
of behavior one must avoid if one is to survive
in the market place.
The investor must see clearly that the error
that has always been committed by him is that
he has been unconscious of the way the
specialist’s short sale provides the subtext for
the Exchange’s economic drama and that he
and other investors have failed to see that it is
actually their demand that calls the specialist’s
short sale into existence. Unaware of this, they
look upon the current demand for stock as a
reflection of “ the market’s underlying
strength.” They continually fail to recognize
that their demand has created and moved into
position the Exchange’s juggernauts of
transition and crisis.

The investor must learn to rise above the

emotional impress of the conventional thinking
and responses of investors by evolving a
procedure that will enable him to act in a way
that is not a response programmed or
contrived by the Stock Exchange. The best
way for him to do this is to practice one-ups-
man-ship on the specialist. The investor must
employ his imagination to move through the
specialists’ looking glass to see himself as he
is seen by the specialist. To do this, he must
imagine himself as a specialist and then
project what his attitudes and behavior
patterns would be toward investors.

Employing this kind of rear view mirror gazing,

the investor can then more readily begin to
recognize specialist short-selling for what it is;
and to understand what his own response
would be to a great influx of public demand.
The very first thing that then happens, of
course, is that the investor sees quite clearly
that were he in the specialist’s position, he too
would employ the opportunity to maximize
profits by acquiring an investment account of
short sales. This then would also be his
ultimate response, as a specialist, to public
demand. The power of recognition is the
investor’s greatest tactical weapon.

Richard W. Wendling

11/23/07

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