More Market Makers are Better

I typically like to invest into small cap stocks only if they have at least 10 market makers.

Markets makers are predominantly in the business of trading off your orders and trading off order flow. Contrary to the opinion of masses that has developed over the past few years, market makers are not usually in the business of creating a large short or long position in an OTCBB or Pink Sheet stock that will be sustained over time unless there is an extremely good reason. As one of the smartest traders that I have ever met once said, "If you're wrong, it's financial suicide."

Therefore, more market makers is usually a positive attribute for any small cap stock. More market makers usually create less risk for the market makers. It's the old fashioned game of Hot Potato. If it's too hot, you can pass it on too someone. This on the same line of thinking creates less of a spread (difference between bid and ask) in the stock quote which is usually attractive to most investors. More market makers also creates a more orderly and efficient market.

It's a simple rule. Look for at least 10 market makers in a stock.

HDVY.OB

Before we say a word about this company, it's important that we state that we are the owner of approximately 550,000 shares of Health Discovery Corporation. This is not a solicitation of any offer to buy or sell. Empire Relations Group Inc., its affiliates, directors, officers, employees and employee benefit programs have a long position in the securities of this Company. We reserve the right and have the right to sell this position anytime in the future.

Health Discovery Corporation is focused on the discovery of biomarkers and the applications of those biomarkers in the pharmaceutical industry, diagnostics industries, medical imaging and personalized medicine.

Biomarkers are characteristics present in the human body that are measured to indicate the presence of a disease. Prostate specific antigen is a biomarker widely used for prostate cancer. Biomarkers as simple as high blood sugar levels could indicate the onset of diabetes.

Biomarkers could be used to:

1. Understand disease pathways
2. Measure drug efficacy on the biomarker as a primary of secondary endpoint for a clinical trial.
3. Conduct clinical trials more efficiently
4. Expedite the drug approval process
5 Improve safety

The completion of the sequencing of the human genome coupled with the emergence of proteomics in addition to sophisticated data analysis tools such as support vector machines has created a new opportunity for biomarker discovery.

Essentially, all diagnostic tests that measure anything in bodily fluid are based on a biomarker. The importance of clinically relevant biomarkers is just beginning to be known in the pharmaceutical industry. Health Discovery Corporation may be at the forefront of new discoveries.

The Company just recently announced the sale of the AIDS Biomarker Signature discovered by company scientists using one of the Company's discovery tools. The sale was completed with the University of Miami.

In addition, the Company recently announced a licensing agreement with Clarient, Inc. (CLRT:NASDAQ).

To conclude, keep any eye on this one. Like many small cap stocks, this company does have some money issues.

Analysts and Small Cap Stocks

Around the year 2000, I had the fortunate experience of being involved in a stock that made a move from 35 cents to over 50 dollars. At the time, I was a stockbroker in New York managing money for very high net worth individuals. Yes, you could win with small cap stocks, For the purposes of this blog, small cap stocks usually mean OTCBB or pink sheet securities.

Over the years, I've always asked myself the question, "Why don't analysts recommend small cap stocks?" Here are the most conventional answers.

1. They're too thin and the analysts could move the price erratically.

2. Too risky.

Although there is some truth to these answers, I believe it goes much further than this.

1. Analysts are in the business of helping Wall Street develop banking fees. How much could the banking fee be for a company only trading with a $20 million capitalization?

2. Yes, they are risky but so is Google at $400. The difference is that most OTCBB and Pink Sheet companies will not be around in 2 years. Although Google may be $200, most people forget that an analyst told you to buy it at $400. But if an analyst tells you to buy a stock at 70 cents and it goes to 0, people usually don't forget.

3. In addition, it is correct that the small cap stocks are thin. Unfortunately, so is a stock trading at a $100 million dollar cap that's been around for 10 years, spent hundreds of millions of dollars in shareholder money, and has never created $1 in operating revenues.

In the end, it comes down to 2 things.

1. Small Cap Stocks don't offer the investment banking opportunities of companies trading on more senior exchanges.

2. Analysts define the herd mentality on Wall Street.

Billions of Shares

I get a bit nervous when I look at a company's balance sheet and I see billions of shares outstanding. Of course, I'm not referring to companies such as Intel and Microsoft. They've done quite well for shareholders. I'm actually referring to small, OTCBB and Pink Sheet companies. This is not the final determining factor for me whether to invest or pass but billions of shares outstanding is not a positive attribute for a small company.

Investing requires an application of common sense. When I see billions of shares outstanding, I usually look for the following:

1. Financings that are not friendly to shareholders.

2. A company with a history of operations with no success.

As one of my business associates once said, "Either conclusion is not good for us."

A Tip

I had an epiphany this afternoon.

I was sitting at my desk when my phone suddenly rang. It was a friend calling with one of those stock tips. They go something like this.

" Listen, I'm not sure about this but my friend heard that something may happen with ABCD Company. I don't know what he knows but he usually gets good info. "

I thanked him and I suddenly envisioned one of those guys at an off track betting service looking to hit the triple on the thoroughbreds. You know, the guy who looks like he hasn't eaten in a few weeks.

This is no reflection on my friend who I have a deep amount of respect for and who is a rather successful guy. Unfortunately, the fact is, tips usually don't work out.

Sometimes I write down a really good quote. A few years ago, I wrote this down, "A few million dollars of my net worth could be attributed to avoiding tips."

I don't ever forget a good tip.

Executions on Small Caps

In June 1988, I began my career as a securities broker in New York. For 13 years, I had a very successful career as a broker. I primarily spent my career at 3 different firms on Wall Street.

With that said, I believe I understand Wall Street very well. The knowledge I gained was the direct result of 13 years in the trenches on Wall Street.

These days, I trade actively for my own account. Several times on a weekly basis, I get frustrated trading my account. The frustration stems from the execution of orders, especially in OTCBB and Pink Sheet stocks. It is important that I bring this to the attention of the "trading public".

Let's just say theoretically a stock is trading at 10 cents (bid) 12 cents (offer) to make it simple. If an order is given to a trader to sell 10,000 shares at the bid (in other words, the order is given with a limit of 10 cents), you will see that the market will probably change to 10 cents (bid) 11 cents (offer). If you immediately look at the Level 2, the firm now offering the stock out is probably the firm that the order was routed to if your broker dealer does not make a market in the stock. Put two or 3 orders in a row to sell the stock on the bid and you'll probably see the same firm go low offer on the stock. Let me say unequivocally that this practice should not be allowed and as far as we're concerned, the trader is not properly following the rules of execution. That trader has an obligation to sell the stock on the bid in a timely manner if the limit order is equivalent to the bid until either that bid price has dropped or your order is filled.

For a novice who may be reading this post, the significance is that the trader is affecting your ability to get an execution. Here is the rule. Put 2 or 3 orders in a row in to sell the stock. Watch the bid and offer carefully. If the offer drops and the same market maker is lowering the offer a few minutes after you have submitted your order each time, then that market maker is not following the rules and is affecting your ability to execute a trade. This only applies if your limit order is on the bid. Otherwise, the market maker is free to execute the order or as we say in the business, work the order. The same applies for buying a stock. If the stock is quoted 10 (bid) 12 (offer), then that market maker has an obligation to execute the order on the offer ( in this case, 12) if your limit order is 12. Many investors may think this is trivial but it is not. It is actually complicated and probably happens on a large percentage of orders in small stocks.

The Great Myth of Shorts

As I peruse the messageboards on the Internet, I can't help but to notice all the chatter about the number of shorts on small cap stocks (OTCBB and Pink Sheets). The chatter seems to increase at the time when a stock price is going down. Although there are people that are involved in the shorting of 1 and 2 cent stocks on the OTCBB and Pink Sheets, I don't believe that most real players in the short game are shorting 1 and 2 cent stocks. Of course, there are rare instances that a stock may have substantial liquidity to establish a short position. With that said, should we really worry about an individual or an institution shorting $15,000 worth of a public company's stock.

Take an example of a company that has 16,000,000 shares outstanding and a stock trading at 10 cents. Let's face it, shorting that stock with a substantial position is potential financial suicide. Good news and the stock is at 80 cents and then try to cover. You're dead !!!!!!!

I always tell our clients the same thing. The short in a small cap stock is usually either an impatient shareholder or the short could be a potential or existing financier. However, no major wirehouse would endorse any of their traders going short $100,000 of stock in a company that trades at a market cap of $2,000,000. The point is to stop worrying about the shorts. In most cases, the shorts on small cap stocks are usually ghosts. Spend your effort on building the company and if you are a sharholder, just open your eyes.