Because individuals submit a huge number of orders overnight for execution the next morning, wholesalers can get a good idea if a stock will open higher or lower. If a wholesaler has overnight orders to buy 20,000 shares but orders to sell only 5,000, the stock is likely to open higher Tuesday. Typically, critics say, the firm buys shares in informal pre-market trading among dealers Tuesday morning. To Burnham, that's nothing less than a violation of insider-trading laws. It's amazing to me that the biggest insider-trading racket on Wall Street continues unabated and nobody seems to care.
Wholesalers scoff at that notion.
He's totally wrong. Although Knight is a sizable wholesaler, it still has only a small portion of overall orders, Pasternak said. His firm might know which stocks some individuals are buying and selling, he said, but it doesn't know what institutions are doing. Thus, if Knight were to buy at the opening simply because individuals were doing so, the firm could lose if heavy institutional selling drove down the price. In fact, he said, the opening is the only time of the day that Knight consistently loses money.