Notices

Level II in the UK

From Traderpedia

In the UK there are 2 types of Level II screens, SETS (order driven) and SEAQ (quote driven).

The Stock Exchange Trading System (SETS) is an electronic limit order book used to trade blue-chip stocks including all FTSE 100 and all UK FTSE Eurotop 300 stocks plus those with traded options. The SETS order book matches buy and sell orders on a price/time priority.

Stock Exchange Automated Quotation (SEAQ) service is the official trading service for the majority of small to mid-cap, domestic securities. On SEAQ all buys and sells go through a market-maker who acts as an intermediary. Level II data provides you with the same data as seen by the professionals in the City. You can see market information that previously only Market-Makers and Institutional Investors could see. Prices are always streaming live prices - there is no need to refresh the screen.


[edit] Level II SEAQ

This type of quotation system is a step up from the Level I. Level II SEAQ provides real-time access to the quotations of individual market-makers registered in every LSE SEAQ stock as well as the offering or bidding sizes that they will trade up to. This level of access gives the name of the market-makers looking to trade the stock, and allows traders to see which ones are showing the most interest in a stock and identify the patterns for each one.

Market-makers provide continuous bid and offer prices for each of the stocks they have on their books. There can be as few as one or as many as 20 (or more) for a particular stock depending on the average daily volume; the more actively traded a stock is, the more attractive it is for them to deal in.

The market-makers play an important, particularly for enhancing stock liquidity and thus generally for promoting long-term growth in the market. They must maintain this continuous two-sided quote (bid and offer) at normal market size or greater at all times. This ensures that there is a buyer for the sell order and a seller for the buy order at any time.

Image:royal_blue.jpg

Lets drill down and look at a Level II SEAQ quote screen in detail for RoyalBlue Group (see screenshot above)

EPIC: RYB: Short-form code for every stock.

Company Name: ROYALBLUE GROUP

Mid 232.5 +20 (+9.41%): Mid price is a simple average price between bid and offer i.e. 225 and 250. It has risen 20p since it closed the previous trading day from 212.5p which is over a 9% increase.

High 240: Price has been as high as 240

Low 227: Price has been as low as 227.5.

Close 212.5: This stocks mid price closed at 212.5 the previous trading day.

NMS 2,000: This is the minimum number of shares that a market maker must make a firm price in. Traders can buy or sell fewer than this number of shares, in which case will definitely deal at the price quoted. Anyone wishing to deal in more than the NMS may have to accept less than the market price if they are selling, and pay more than the market price if they are buyer.

Spread: The percentage shown is the difference between the bid and ask price of 225/240 ie 25p which is a 6.25% spread. The lower the spread the better.

Trades: these are the details of the last 5 trades that have occurred today

Time stamp: the last time each individual market maker changed their price in either an upward or downward direction.

Size: this is the size that the market maker is prepared to deal in at the prices he is quoting. Notice that in most cases they are prepared to deal at the prices quoted at 3,000 shares rather than the normal market size of 2,000.

Market makers codes: this is a short-form code for each market maker. MLSB: Merrill Lynch; UBSW: UBS Warburg; WINS: Winterfloods; KLWT: Dresdner Kleinwort; etc

Buy orders: the price each market maker is prepared to buy stock from you at.

Sell orders: this is the price each market maker is prepared to sell stock to you at.

Colour coding: provide a graphical indication of the depth of the market and bands the prices market makers are offering


[edit] Market Makers

A market maker runs a shop and investors buy shares from him or sell them back to him. The rules for SEAQ stocks insist that all share transactions must go through a market maker. The market makers act as retailers of shares and display their prices during working hours (8.00-4.30pm). The prices may vary (sometimes considerably) during the day, depending on a number of influences.

For example, if the holder of a very large amount of a share decides to sell (or many holders of small amounts), the market makers will reduce the price they are prepared to pay for the share. The converse is true also; if there is a consistent and large enough demand for a share, then the market makers will increase the price.

Market makers make money from buying shares at a lower price to which they sell them. This is the bid/offer spread. The more actively a share is traded, the more money a market maker makes. It is often felt that the market makers manipulate the prices. However, market manipulationis an emotive term that conjures up images of shady deals and exploitation. In fact, they are not elusive companies that appear then vanish overnight. They are duty bound to make a market and to meet the needs of those they are responsible to, so to this end they may try to influence the market.

However, market makers are known to lower prices to panic investors into selling, sometimes called shaking the tree. Moving the price up encourages sells, moving it down also encourages sells. The opposite is a dread cat bounce, a false mark-up to catch out all those bottom fishers or falling knife catchers.

One of the myths surrounding market makers is that they take positions in the stocks they quote, the usual cry is the market makers are shorting this stock; thats why the price is going down. Wrong. Market makers make money by churning stocks, not by taking a position. This does not mean that they do not end up with an excess or a shortage of stock but the cost of holding and the risk of being the wrong side does not make commercial sense.


[edit] Level II SETS

SETS (stock exchange electronic trading system) is an electronic order-driven system for trading the UK blue chip stocks including FTSE 100 and FTSE Eurotop 300 stocks. The SETS order book matches buy and sell orders on a price/time priority. On SEAQ all buys and sells go through a market maker who acts as an intermediary.

The basis of SETS is that it directly matches willing buyers and sellers, creating efficiency in the markets by doing away with the intermediary of the market maker. This efficiency is true while the SETS system is populated by the most liquid and heavily traded stocks, but if matched bargains operate on less liquid stocks, waiting for a buyer to match with a seller could take hours, days or weeks. Because of the efficiency of the SETS system stocks traded tend to have narrow spreads so the cost of entry and exit from a position is much smaller.

As an ordinary trader should you wish to buy or sell a SETS stock, your broker will invariably still trade through a market maker, who will not display separate prices but simply use the SETS Level 2 screen to indicate where the market lies.

Image:sets.jpg

Lets have a look at a Level II SETS quote screen in detail for Desire Petroleum (see screenshot above)

EPIC: DES: Short-form code for every stock.

Company Name: Desire Petroleum

Mid 29.25 - 3.25 (-10%): Mid price is a simple average price between bid and offer i.e. 28 and 30.50.

High 33.20: Price has been as high as 33.20

Low 25.50: Price has been as low as 25.50.

Prev Close 32.50: This stocks mid price closed at 32.50 the previous trading day.

NMS 5,000: This is the minimum number of shares that a market maker must make a firm price in. Investors can buy or sell fewer than this number of shares, in which case will definitely deal at the price quoted. Anyone wishing to deal in more than the NMS may have to accept less than the market price if they are selling, and pay more than the market price if they are buyer.

Spread: The difference between the bid and ask price of 28 and 30.5 ie 2.5p. The lower the spread the better.

Trades: these are the details of the last 8 trades that have occurred today.


VWAP: Volume Weighed Average Price: this is a running mean average benchmark especially used by institutions. Calculated by adding up the pence traded for every transaction (price times shares traded) and then divided by the total shares traded for the day. The theory is that if you buy at a price lower than the VWAP. it is a good trade.

Vol 49,477,030: This is the accumulated total of all trades that have occurred so far that day.

Buy and sell orders: There is a considerable number of order types in the markets but for the purposes of explaining SETS we need to deal with just the two main types.