Level 2 and MM's

[ColinRiche]

OK hands up, i just cant follow Level 2, i just dont see it...

I'll tell ya what i do see and then maybe someone could help me from there.

I see that its very fast moving to start with
I can identify the Axe or Axe's thanks to Trader333
I can see the ECN's
The Axes usually are SCHB and NITE on the stocks that i look at anyway.

I cant see what the MM's are trying to do
I hear the phrase used "theres an Axe in the stock"
But there's always an Axe in the stock and on both sides

I take it most of these MM orders are automated - they move around so quick in the blink of an eye.

I can see that when he is buying his orders are close to the inside on the bid and moves his order on the Ask further away.
When his order is on the inside others come in above him or his order is moved

Now i dont know if thats cos he got filled or changed his view

When his orders are both close to the inside i cant tell if he is buying or selling or just trading the spread.

These orders from Schwab are they for there Institutional clients or there retail clients or both
As a former Schwab customer years ago i seem to remember they guaranteed there fills but were long only.
Do i take notice of these orders or treat them like an ECN and take more notice of the likes of Knight ?

As you can see i haven't got a clue really

Any help much apprehiated
.

 

[Grey1]

Colin,

All your questions are very logical and all trades face the same problem .. It is not an easy task to find the intention of MM's not until, the event has occurred.. This is why , coaches prefer to have a post analysis of the events than the real time.. I use Charts and only use very basic L2 to find the nearest support and resistance for my entry ..

However to answer your questions

Quote “I cant see what the MM's are trying to do “

Market makers can do two things.

1) Be a Dealer …fill the customers orders.. NO MARKET RISK.. PURE PROFIT
2) Be a Trader ..Trade for them selves ( MARKET RISK ).. Just like us ..

So the first thing you do is to identify if they are playing the game as dealers or traders.. Not clear cut situation ..

Some clues,

a) When an AX is behaving as a dealer the stock goes through a range .. This is the best time to shadow him
b) When AX goes low offer he often is the buyer of stock .. .. you can spot that by seeing the AX moving from high bid to low offer but stays on offer short period of time compared to the time at the bid..





Quote “ hear the phrase used "theres an Axe in the stock"
But there's always an Axe in the stock and on both sides

Yes there is .. But they are the smaller firms..


Quote “Now i dont know if thats cos he got filled or changed his view “

Clue:-- when he finishes buying other smaller firms often follow him so , you be seeing a rush of smaller firms trading the momentum .. The problem is when the AX leaves the bid, is he really finished buying or coming back later to have another bite ?

Many traders feel L2 is only a game of reading the subjective intention of players and that is an Art than a mechanical and un arguable clear cut strategy. I see the use of L2 as a secondary tool to reduce risk of entry than playing the momentum game..

I will later post a quiz on L2 Trading tricks that I know of,//

PS:-- meanwhile have a look a this link



http://www.elitetrader.com/vb/showthread.php?s=&threadid=20940

 

[BBB]

Something I ripped off Trading Mrkets a while back. May help, but then again...

 

[Grey1]

Excellent contribution BBB.. Thanks

I have a quiz here

1) Market makers do not know the order flow of other firms so they are forced to show their intention by biding ,,

2) MM does not leave the bid after being SOESed 1000 share .. This means he is bullish the stock

3) When MM quotes show a large size and then disappear, there is a high probability of that being the the continued direction of the next move.

4) it is not important to see how far AX retreats from best bid or best offer.

5) It is not important to see how AX react when other MMs join him ..

6) Stock rallies but AX does not join ..He stand his ground .. This is a bearish sign for the next price fall

7) How far a pull back an AX allows a runaway stock to retreat is the key to bullishness..
8) AX is holding the best offer and then retreats and reappears on the best bid.. the AX is bullish ?

Which of the above is false and WHY ?

 

[BBB]

1 & 3?

I'm not a LII expert by any means.

There could be more....

 

[TheBramble]

I'm not a poker player - I'm a tyro LII watcher - so my responses are targets for your comments rather than seasoned reasonings from a pro...


1) Market makers do not know the order flow of other firms so they are forced to show their intention by biding ,,

FALSE. MMs do not necessarily know the order flows of other firms, but they do not show their intention by bidding. They try and get the other guy to show his intention.

2) MM does not leave the bid after being SOESed 1000 share .. This means he is bullish the stock

POSSIBLY TRUE. If you mean 1,000 showing on LII (i.e. 100,000 shares) then he's bullish beyond belief. If you mean showing 10 on LII - not necessarily.

3) When MM quotes show a large size and then disappear, there is a high probability of that being the the continued direction of the next move.

TRUE? (Have no basis for that - just 'feels' about right.)

4) it is not important to see how far AX retreats from best bid or best offer.

FALSE. Distance AX retreats could be indicative of continuing play at the inside bid/offer after the smaller firms followed him into his previous trade.

5) It is not important to see how AX react when other MMs join him ..

FALSE. It's important to judge how the AX responds to ALL moves.

6) Stock rallies but AX does not join ..He stand his ground .. This is a bearish sign for the next price fall

TRUE. If the AX isn't making a bullish market in this stock - who else could sustain it?

7) How far a pull back an AX allows a runaway stock to retreat is the key to bullishness..

FALSE. It's just a retreat. They're not bullish or they'd be supporting it.

8) AX is holding the best offer and then retreats and reappears on the best bid.. the AX is bullish ?

FALSE. Could be smoking out the buyers by appearing to want to buy.

Reading the above I've realised they could all be correct, as could their converse. Very interested in others' responses on this one.

 

[BBB]

My reasoning is as follows:
1 - False, because if you read any large brokers annual report, you will see they receive payment from MM firms to fill their order flow. This shows they know where the orders are.

3 - I read somewhere that MM will often show large size away from the inside and then withdraw. This is done to create the illusion of demand/supply.

This last reason is why I felt LII was probably more of a headache than it's worth and of only use to spread monkeys. There is enough deceit in the market as it is. I decided to base my trading around what is, not what may be. I may occasionally look at time & sales.

Thats why I dont have an opinion on the others/know little about LII

May be I should change my opinion. After all, all the cents in slippage add up...

 

[TheBramble]

My reasoning is as follows:
1 - False, because if you read any large brokers annual report, you will see they receive payment from MM firms to fill their order flow. This shows they know where the orders are.

...but not on a second-by-second basis!

 

[BBB]

I've never thought Bramble. I see no reason why all orders aren't routed to the mm immediately. Under NASD regulations, the MM has 3 mins to accept or reject it.

Of course, as Trader333 pointed out a while back, direct access resolves this as you can decide where to direct your order.

 

[CityTrader]

Well having been a UK MM for 18 years, I guess I can answer most of your UK based MM questions. Nasdaq MM, is however a mystery to me..

Wayno

 

[triplepack]

When following on LII more often than not I find the ecns are best bid/offer with the mm's a level or two behind. Are the ecns, (BRut for eg) smothering the mm's and their positions on the screen and therefore taking away whatever meaning that their positions and size might imply for the direction of the stock.
However the ecns maywell be populated by the mm's and they are actually giving that information but anonymously ?

Would more value be gained by removing the ecns from the screen and having them dispalyed separately leaving the mms on the LII only?



Richard

 

[Rognvald]

Here is some basic information and links to more for those who want to look at q's raised by BBB in first post
http://daytrading.about.com/cs/nasdaqlevelii/a/level_ii.htm?PM=ss13_daytrading

also
http://www.value-stock.com/level2.htm

 

[triplepack]

Rognvald,

Very interesting links Thanks.

Triplepack

 

[Rognvald]

Also an interesting thread from the oppo
http://www.elitetrader.com/vb/showthread.php?s=&threadid=28023&perpage=6&pagenumber=1

 

[triplepack]

Thanks Rognvald,
Just got notification of ur reply, thanks for that, very good of u i,ll be having a read later today.

Cheers
Richard

 

[triplepack]

Rognvald,

Just read the last link u posted. It answered a few of my questions I 've had regarding how the mms use ecns and not really divulging much on L2. However having been following Grey1's comments on Trading and his use of L2 I can see the benefit from that perspective of determining risk and suitable stocks for entries using his strategies. Naz has another approach which I think is the traditional daytraders approach and I've benefitted from his advice regarding managing the trade and squeezing the optimum out of a position.
I think Ecns are probably more of what L2 was in the late 90's with more transparency but unfortunately anonymous.
Cant have allways I suppose. lol.


Richard

 

[Grey1]

triple,

Most L2 traders are looking for other alternatives to gain an edge over the market.. The use of L2 where prices approach to upper and lower VWAP becomes more appropriate as one has eliminated most noise which append between the bands..

regards

 

[triplepack]

Hi Grey,
Yes I agree with you , Its been very interesting few days on paltalk with u. I only wish that I had my tradestation active so I could follow vwap alerts etc and to get a feel where the price of other stocks are with ref to their vwap and to see how they revert to it. I'll be there on Tuesday with the others following and learning. I like ur Screener alert sound, sounds like a stapler machine going crazy on the open lol.
Catch u Wednesday.

Richard

 

[BBB]

One reason I believe L2 users should be cautious is the latency of data if you are using a commercial ISP over a DSL line.

This means the prices you see are going to be way behind (around 0.5 sec at an estimate) to what someone in a prop house using an industry strength T1 line will see.

With a commercial ISP your data will be pushed down a very heavily oversubscribed line that competes against your next door neighbours porn surfing. Not only that, but the path of data is roughly exchange - data provider - (broker?) [ok so far, were on a level playing field] - internet (this is the trouble) - your PC.

A prop house, bank etc will cut out the 'internet' by using VPN or such technology which guarantees them bandwidth and therefore speed.

Don't believe the hype about L2 putting you on a level playing field unless you do have T1 or VPN's arranged.

I'm sorry if this breaks anyones beliefs/dreams/image, but we may as well be realistic about life.

...of course, this is probably only a concern if playing for cents with mega hyper activity - which I assume none of us are.

 

[LevII]

BBB,

Do you have any idea of the difference in delay between commercial ISP over a DSL line and commercial ISP over a sattelite feed?