During the crash at the end of 2008, pretty much everyone was selling their stock and the market tumbled approximately 50%. Who purchased the stock? Was it market makers or other people? I understand that market makers always try to offset their positions, but if there aren't any buyers are they forced to accumulate?
Just before a crash or at the start of the crash most of the smart money would have gotten out, the remaining technical traders would be out by the time the market has dropped 10 to 15%, and some of them would be shorting their positions by now.
Most long-term buy and hold investors would stick to their guns and stay in for the long haul. Some will start to get nervous and have sleepless nights when the markets have fallen 30%+ and look to get out as well. Others stay in until they cannot stand it anymore. And some will stick it out throughout the downturn.
So who are the buyers at this stage? Some are the so called bargain hunters that buy when the market has fallen over 30% (only to sell again when it falls another 20%), or maybe buy more (because they think they are dollar cost averaging and will make a packet when the price goes back up - if and when it does). Some are those with stops covering their short positions, whilst others may be fund managers and individuals looking to rebalance their portfolios.
What you have to remember during both an uptrend and a downtrend the price does not move straight up or straight down. If we take the downtrend for instance, it will have lower lows and lower highs (that is the definition of a downtrend). See the chart below of the S&P 500 during the GFC falls.
As you can see just before it really started falling in Jan 08 there was ample opportunity for the smart money and the technical traders to get out of the market as the price drops below the 200 MA and it fails to make a higher peak.
As the price falls from Jan 08 to Mar 08 you suddenly start getting some movement upwards. This is the bargain hunters who come into the market thinking the price is a bargain compared to 3 months ago, so they start buying and pushing the price up somewhat for a couple of months before it starts falling again. The reason it falls again is because the people who wanted to sell at the start of the year missed the boat, so are taking the opportunity to sell now that the prices have increased a bit. So you get this battle between the buyers (bulls) and seller (bears), and of course the bears are winning during this downtrend. That is why you see more sharper falls between Aug to Oct 08, and it continues until the lows of Mar 09.
In short it has got to do with the phycology of the markets and how people's emotions can make them buy and/or sell at the wrong times.
If we can agree that 2010 was closer to the low of 2009 than 2007 then the rich did all the buying while the super-rich did all the selling.
Percent of all stock owned: Wealth class 2001 2004 2007 2010 Top 1% 33.5% 36.7% 38.3% 35.0% Next 19% 55.8% 53.9% 52.8% 56.6% Bottom 80% 10.7% 9.4% 8.9% 8.4%
Looks like the rich cleaned up during the Tech Crash too, but it looks like the poor lost faith.
That limited data makes it look like the best investors are the rich.
Market makers are only required by the exchanges to provide liquidity, bids & asks. They aren't required to buy endlessly.
In fact, market makers (at least the ones who survive the busts) try to never have a stake in direction. They do this by holding equal inventories of long and shorts. They are actually the only people legally allowed to naked short stock: sell without securing shares to borrow. All us peons must secure borrowed shares before selling short.
Also, firms involved in the actual workings of the market like bookies but unlike us peons who make the bets play by different margin rules. They're allowed to lever through the roof because they take on low risk or near riskless trades and "positions" (your broker, clearing agent, etc actually directly "own" your financial assets and borrow & lend them like a bank).
This is why market makers can be assumed not to load up on shares during a decline; they simply drop the bids & asks as their bids are hit.