The voice Alice Littles heard was not the one that implored. In fact, it snored. The Doormouse snapped awake from its tableside nap.

"How is a stockbroker like a cold?" blurted the Hatter.

"Oh, a riddle," said Alice. "I love riddles. I think I can guess it."

Alice ruminated. She postulated. And then, she embarassingly eructated. In other words (two, precisely), she belched. "Oops. Sorry. That's from my Diet Pepsi Float."

"Perhaps you should have some more tea, then," said the March Hare.

"Have you guessed the riddle yet?" asked the Hatter.

"No, I give. What's the answer?"

"One sells your shares, the other shares your cells."

Alice sighed. "I think you might do something better with your time."

"I'm not through yet," said the Hatter. "One may share large blocks of cells, and the other may sell large blocks of shares. So: when we hear of specialists trading large blocks, how does this affect the stock price?"

1) It drives the price up, making the stock appear overvalued
2) It generates liquidity through price adjustment, where there may not have been any previously
3) It lowers the price, making it look as if a lot of selling is going on
4) It doesn't affect the prices at all

The answer is 2) It generates liquidity through price adjustment, where there may not have been any previously

Now and again you may run across a stock that isn't moving very well. All stocks, regardless of how popular, have a Specialist or Market Maker making a market (trading) in the stock. If the stock isn't moving, the Specialist might make a large block purchase, either for his own inventory, or to sell to a firm or institution willing to buy a large block of the stock. By doing this after hours, he avoids causing an imbalance in the stock's price, and is able to make an adjustment in the price without adversely affecting the market in the stock. He is only allowed to do this if the stock, for whatever reason, can't be absorbed in the market (doesn't have corresponding buy and sell orders, and can't move without a price adjustment).

As far as Alice could see from the statement she still held in her hand, she owned no blocks to trade.

The doorbell rang. It was an invitation to the Queen's croquet game.

"If I can't trade large blocks," she thought, "At least I can trade places, and get away from this madness." Little did Alice Littles know that she would soon feel the sting of the Queen.

© Copyright 1995-2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us